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Net present value (NPV) calculator

What is the net present value (NPV)?

Net present value (Net Prent Value, NPV) is the difference between the present value of expected cash inflows and the present value of expected cash outflows over the life cycle of an investment project. It is the most central and scientific indicator of decision-making in financial management and project evaluation. NPV considers the time value of money, which is “one dollar more valuable today than next year's one dollar”.

NPV formula

The basic formula for NPV is as follows:

NPV = Σ [ Ct / (1 + r)^t ] - C0

Of which:

  • Ct: t per year cash inflows
  • rDiscount rate (capital cost or target rate of return)
  • tYear in which cash flows occurred
  • C0Total initial investment

How do you interpret the NPV results?

NPV ' s decision-making principles are clear:

  • NPV > 0: Indicates that the project is expected to have a higher return on investment than the discount rate and that the project will add value to the enterprise. Financially, yes.It's possible.Yeah.
  • NPV < 0: Indicates that the project has an expected return of less than capital cost and that the project will result in loss or a decrease in value. FinanciallyReject。
  • NPV = 0: Indicates that the project has just reached the expected level of return, and has neither added nor reduced value.

IRR, PI and the auxiliary role of the recycling period

In addition to NPV, our tools provide three key complementary indicators:

  • Internal rate of return (IRR): to equal NPV to zero discount rate. It represents the actual annualized return on the project. If IRR is greater than the discount rate, normally NPV is positive.
  • Profit Index (PI): Ratio of current to outward inflows. PI > 1 indicates that the project is profitable. It is often used to compare projects of different sizes when the budget for the fund is limited.
  • Static recovery period: the time required to recover the initial investment. While it does not take into account time value, it provides a visual picture of the speed of the return of funds and liquidity risks.

Apply scene examples

1. Acquisition of equipment: Difference between the cost savings from the purchase of new machines and the present value of the initial purchase expenditure.
2. Software development: Assess whether the subscription revenue over the next five years is sufficient to cover current R & D and marketing inputs.
3. Real estate investments: Whether the current purchase price is reasonable on the basis of the estimated rental proceeds and future resale value.