This online Net Present Value Calculator performs calculation of the net present value (NPV) of a series of future cash flows. To add or subtract a cash flow period click the “+” symbol or the “–” symbol respectively.
Net Present Value Formula
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.
The following formula is used to calculate the net present value:
$$\mathrm{NPV}(r,N) = \sum_{t=0}^{N} \frac{C_t}{ (1+r) ^{t}},$$
where:
\(t\) – the time of the cash flow (the cash flow period number);
\(r\) – the discount rate, i.e. the return that could be earned per unit of time on an investment with similar risk;
\(N\) – the number of cash flow periods (usually years);
\(C_{t}\) – the net cash flow i.e. cash inflow – cash outflow, at time \(t\). Note that \(C_{0}\) is (minus) the investment.
A positive net present value indicates that the projected earnings generated by a project or investment – in present money value – exceeds the anticipated costs, also in present money value. It is assumed that an investment with a positive NPV will be profitable, and an investment with a negative NPV will result in a net loss.
Calculation of the net present value is used to find today’s value of a future stream of payments. It accounts for the time value of money and can be used to compare investment alternatives that are similar. The NPV relies on a discount rate of return that may be derived from the cost of the capital required to make the investment. So any project or investment with a negative NPV should be avoided. An important drawback of using an NPV analysis is that it makes assumptions about future events that may not be reliable.
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