Calculate net present value of future cash flows with adjustable discount rates. Includes IRR, profitability index, payback period, and sensitivity analysis.
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Net Present Value (NPV) is the difference between the present value of cash inflows and the initial investment. It tells you whether a project or investment will add value at a given discount rate. A positive NPV means the investment earns more than the required rate of return, while a negative NPV means it falls short. This calculator computes NPV along with IRR, profitability index, payback period, and a full sensitivity analysis — all in real time.
Net Present Value discounts all future cash flows back to today's dollars using a required rate of return (discount rate). The NPV formula sums each discounted cash flow and subtracts the initial outlay. If the result is positive, the investment creates value. If negative, it destroys value. NPV is the gold standard metric in corporate finance, capital budgeting, and project evaluation because it accounts for the time value of money.
NPV Formula
NPV = -C₀ + Σ CFₜ / (1 + r)ᵗNPV accounts for the time value of money, giving you a more accurate picture than simple return metrics. A dollar today is worth more than a dollar tomorrow, and NPV quantifies this exactly.
When evaluating multiple investment opportunities, NPV gives a single dollar figure for comparison. The project with the highest NPV adds the most value to your portfolio.
This calculator automatically computes the Internal Rate of Return (IRR) — the discount rate where NPV equals zero. Comparing IRR to your hurdle rate provides an instant accept-or-reject signal.
The sensitivity analysis shows how NPV changes across different discount rates, helping you understand how robust your investment is to changes in interest rates or required returns.
Beyond NPV, you get profitability index, payback period, discounted payback, and period-by-period breakdowns — everything you need for a thorough investment analysis.
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A positive NPV means the investment is expected to earn more than the required rate of return. Generally, any NPV greater than zero is considered acceptable. The higher the NPV, the more value the investment creates. However, you should also consider the profitability index (NPV per dollar invested) when comparing projects of different sizes.
NPV gives you the dollar amount of value created or destroyed by an investment. IRR gives you the percentage return rate where NPV equals zero. Both are useful: NPV tells you how much value is created, while IRR tells you the rate of return. When comparing mutually exclusive projects, NPV is generally preferred because it accounts for project size.
Future cash flows are discounted because of the time value of money — a dollar today can be invested and earn returns, making it worth more than a dollar received in the future. Discounting converts future dollars into present-day equivalents so you can make apples-to-apples comparisons.
A negative NPV means the present value of expected cash inflows is less than the initial investment. In other words, the project does not earn enough to justify the required rate of return. Under NPV rules, negative-NPV projects should be rejected because they would destroy value.
To calculate NPV by hand: (1) List all cash flows including the initial investment as a negative number. (2) For each future cash flow, divide by (1 + r) raised to the power of the period number. (3) Sum all the discounted cash flows. The result is the NPV. For example, with a $100 investment and $60 cash flows in years 1 and 2 at 10%: NPV = -100 + 60/1.10 + 60/1.21 = -100 + 54.55 + 49.59 = $4.14.
The discount rate should reflect the cost of capital or the minimum acceptable rate of return. Common choices include: the weighted average cost of capital (WACC) for corporate projects, the expected return of alternative investments for personal decisions, or the borrowing rate plus a risk premium. Higher-risk projects warrant higher discount rates.
In Excel, use =NPV(rate, value1, value2, ...) + initial_investment. Note that Excel's NPV function assumes cash flows start in period 1, so you must add the initial investment (as a negative number) separately. For example: =-100000 + NPV(0.10, 30000, 35000, 40000, 45000, 50000) calculates NPV with a 10% rate and five cash flows.
The profitability index (PI) equals the present value of cash inflows divided by the initial investment. A PI greater than 1.0 indicates the investment creates value. PI is especially useful when you have a limited budget and need to rank projects by value per dollar invested. For example, a PI of 1.25 means you earn $1.25 in present value for every $1.00 invested.
NPV and ROI measure different things. NPV gives the total dollar value created, accounting for the time value of money. ROI gives a simple percentage return without considering when cash flows occur. For capital budgeting decisions, NPV is more reliable because it accounts for timing and scale. ROI is useful for quick comparisons but can be misleading for long-term projects.
NPV is the primary tool for capital budgeting because it directly measures value creation. Companies use NPV to decide which projects to fund: accept all positive-NPV projects when capital is unlimited, or rank projects by NPV (or profitability index) when capital is constrained. It ensures resources go to the projects that maximize shareholder value.