Net Present Value (NPV) Calculator
Calculate the net present value of a series of regular, periodic cash flows (investments and returns) discounted at a specific target rate of return.
Enter your discount rate and periodic flows on the left to calculate.
Understanding NPV (Net Present Value)
The Net Present Value (NPV) is a core financial metric used to evaluate the profitability of an investment or project. It represents the difference between the present value of cash inflows and the present value of cash outflows over a regular, periodic span of time. By accounting for the time value of money (that a dollar today is worth more than a dollar tomorrow), NPV helps businesses determine whether a project will add value to the enterprise.
The Mathematical Formula
NPV is calculated by discounting each periodic cash flow back to Period 0:
Where:
- Ct = The cash flow transaction at period t (Negative for outflows, Positive for inflows).
- t = The index period number (from 0 to N).
- r = The periodic discount rate (as a decimal).
For monthly or quarterly compounding, the periodic discount rate is determined by dividing the annual rate by the number of compounding periods in a year (e.g. r = Annual Rate / 12 for monthly intervals).
Worked Example
Scenario: 3-Year Project at 8% Annual Discount Rate
| Period (Year) | Cash Flow ($) | Present Value ($) |
|---|---|---|
| Period 0 (Start) | -50,000 | -50,000.00 |
| Period 1 (Yr 1) | +20,000 | +18,518.52 |
| Period 2 (Yr 2) | +25,000 | +21,433.47 |
| Period 3 (Yr 3) | +30,000 | +23,814.97 |
Adding up the discounted present values: -50,000 + 18,518.52 + 21,433.47 + 23,814.97 = +$13,766.96. Since this value is positive, the project yields returns in excess of your cost of capital (8%).