NPV Calculator — Free Net Present Value Tool

How to Use the NPV Calculator

This calculator computes the net present value of a series of cash flows, helping you determine whether an investment, project, or financial decision creates value after accounting for the time value of money. NPV is the most widely recommended method for investment evaluation in both corporate finance and personal financial planning.

1. Set the discount rate. Enter your required rate of return as a percentage. For corporate projects, this is typically the weighted average cost of capital (WACC). For personal investments, use the return you could earn on an alternative investment of similar risk. The default is 8%, representing a typical long-term equity market return. A higher discount rate means future cash flows are worth less today.
2. Enter the initial investment. In the Year 0 field, enter the upfront investment as a negative number. For example, entering -100000 represents a $100,000 initial outlay. This is the cash leaving your pocket at the start of the project.
3. Add expected cash flows. Enter the cash flows you expect to receive in each subsequent year. These are typically positive numbers representing revenue, savings, or proceeds. If a particular year requires additional investment, enter that as a negative number. Use the "+ Add Cash Flow Period" button to extend the analysis to more years.
4. Interpret the results. A positive NPV means the project earns more than your required rate of return and creates value. The profitability index shows value created per dollar invested. The calculator also displays an accept or reject recommendation based on whether NPV is positive or negative.

Try adjusting the discount rate to see how sensitive the NPV is to your return assumptions. If NPV remains positive even at higher discount rates, the investment has a strong margin of safety.

Understanding the NPV Formula

Net present value is the cornerstone of discounted cash flow (DCF) analysis, the most rigorous method for valuing investments, companies, and financial instruments.

The NPV Formula

Expanded form:

Where:

• CF_t = Cash flow at time period t (negative for outflows, positive for inflows)
• r = Discount rate (required rate of return)
• n = Total number of periods
• t = Time period (0 for today, 1 for year 1, etc.)

Profitability Index Formula

Step-by-Step Calculation Example

Calculate the NPV of a $120,000 investment that generates $40,000, $45,000, $50,000, and $35,000 over four years, using a 10% discount rate:

1. Year 0: -$120,000 / (1.10)⁰ = -$120,000
2. Year 1: $40,000 / (1.10)¹ = $36,364
3. Year 2: $45,000 / (1.10)² = $37,190
4. Year 3: $50,000 / (1.10)³ = $37,566
5. Year 4: $35,000 / (1.10)⁴ = $23,905
6. NPV: -$120,000 + $36,364 + $37,190 + $37,566 + $23,905 = $15,025

The positive NPV of $15,025 means this investment creates $15,025 in value above and beyond the 10% required return. The profitability index is ($36,364 + $37,190 + $37,566 + $23,905) / $120,000 = 1.125, meaning every dollar invested generates $1.125 in present value.

Why the Discount Rate Matters

The discount rate dramatically impacts NPV. Using the same cash flows above: at 5%, NPV = $38,845; at 10%, NPV = $15,025; at 15%, NPV = -$4,082. The rate at which NPV crosses zero (approximately 13.7% in this case) is the Internal Rate of Return (IRR). Understanding this sensitivity is crucial for making robust investment decisions.

Practical NPV Examples

These real-world scenarios demonstrate how NPV analysis guides decision-making across different investment contexts, from corporate capital budgeting to personal financial planning.

Business Expansion Decision

Hannah, a restaurant owner, considers opening a second location. The startup cost is $250,000. She projects the new restaurant will generate net cash flows of $50,000 in Year 1, $70,000 in Year 2, $80,000 in Year 3, $85,000 in Year 4, and $90,000 in Year 5. Using a 12% discount rate (reflecting the risk of a restaurant business), the NPV calculation discounts each cash flow: $44,643 + $55,804 + $56,943 + $54,012 + $51,066 = $262,468 present value of inflows. NPV = $262,468 - $250,000 = $12,468. The positive NPV suggests the expansion creates value, with a profitability index of 1.05. While the margin is slim, the strategic value of brand growth supports the decision.

Equipment Replacement Analysis

Thomas manages a logistics fleet and must decide whether to replace aging delivery trucks. New trucks cost $180,000 but reduce fuel costs by $25,000 per year, reduce maintenance by $15,000 per year, and have a $30,000 residual value after 7 years. Cash flows: Year 0 = -$180,000; Years 1-6 = $40,000; Year 7 = $70,000. At an 8% discount rate, NPV = -$180,000 + $37,037 + $34,294 + $31,753 + $29,401 + $27,223 + $25,206 + $40,877 = $45,791. The positive NPV of $45,791 clearly justifies the truck replacement. Even at a 12% discount rate, NPV remains positive at $23,118, showing strong financial fundamentals.

Graduate Education Decision

Sofia considers an MBA program costing $80,000 per year for 2 years, with an additional $60,000 per year in lost salary. After graduation, she expects her salary to increase by $40,000 per year for the next 20 years. Cash flows: Years 0-1 = -$140,000 each; Years 2-21 = $40,000 each. At an 8% discount rate, the present value of 20 years of $40,000 salary increases (starting in Year 2) is approximately $353,000, while the present value of costs is $269,600. NPV = $83,400, confirming the MBA is a value-creating investment with a profitability index of 1.31.

NPV Tips and Complete Guide

Mastering NPV analysis gives you a rigorous framework for evaluating any financial decision that involves cash flows over time, from multi-million-dollar corporate investments to personal financial choices.

Always Use the Correct Discount Rate

The single most important input in NPV analysis is the discount rate. Using a rate that is too low will make bad investments appear good, while a rate that is too high will cause you to reject value-creating opportunities. For corporate projects, use the company's WACC. For personal decisions, use the return on your best alternative investment. When uncertain, calculate NPV at multiple rates (sensitivity analysis) to see how the decision changes. If NPV is positive across a wide range of reasonable discount rates, you can be confident in the investment.

Build Realistic Cash Flow Projections

NPV is only as reliable as the cash flow estimates it uses. Avoid overly optimistic projections by researching industry benchmarks, using historical data, and accounting for likely delays and cost overruns. Include all relevant cash flows: not just revenue, but also maintenance costs, working capital requirements, taxes, and opportunity costs. For long-term projects, consider whether cash flows will grow (with inflation or business growth) or decline (as competition increases or equipment ages).

Run Scenario Analysis for Better Decisions

Create three scenarios: optimistic, base case, and pessimistic. Calculate NPV for each. If NPV is positive even in the pessimistic scenario, the investment has a strong safety margin. If NPV is only positive in the optimistic scenario, the investment is risky and depends on everything going right. Probability-weighted NPV (expected NPV) combines all scenarios: if there is a 25% chance of NPV = $100,000, a 50% chance of NPV = $30,000, and a 25% chance of NPV = -$40,000, the expected NPV is $25,000 + $15,000 + (-$10,000) = $30,000.

Consider Non-Financial Factors Too

While NPV provides an objective financial framework, some investments create value that is difficult to quantify: employee skill development, brand reputation, strategic positioning, or regulatory compliance. If an investment has a slightly negative NPV but provides significant strategic benefits, it may still be worth pursuing. Conversely, a positive-NPV project with serious reputational or ethical risks may not be worth the non-financial costs. Use NPV as the starting point for analysis, not the only factor in your decision.

Common Mistakes to Avoid

• Using the wrong discount rate. The most common and costly NPV error. Using a company's cost of debt (4-6%) instead of WACC (8-12%) can make an unprofitable project appear attractive. Always use a rate that reflects the true opportunity cost and risk of the investment.
• Forgetting to include all cash flows. Omitting working capital requirements, maintenance costs, tax implications, or wind-down costs inflates NPV and leads to overly optimistic investment decisions. Map out every cash inflow and outflow before calculating.
• Ignoring inflation consistency. If your cash flows are in nominal terms (including inflation), use a nominal discount rate. If your cash flows are in real terms (inflation-adjusted), use a real discount rate. Mixing nominal cash flows with a real discount rate, or vice versa, produces incorrect results.
• Not doing sensitivity analysis. A single NPV number implies false precision. Always test how NPV changes when key assumptions (discount rate, cash flows, timing) vary by 10-20%. This reveals the robustness of the investment thesis and identifies the most critical assumptions to monitor.
• Comparing projects with different lifespans. A 3-year project with $20,000 NPV is not directly comparable to a 10-year project with $30,000 NPV. Use equivalent annual annuity (EAA) or replacement chain analysis to make fair comparisons across different project durations.