What Is Net Present Value?
Net Present Value (NPV) measures how much value an investment creates after accounting for the time value of money. Because a dollar received in the future is worth less than a dollar today, each future cash flow is discounted back to today using a discount rate. A positive NPV means the project is expected to add value; a negative NPV means it destroys value.
How to Use This Calculator
Enter the discount rate per period (as a percentage), the initial investment paid out today (t=0), and the series of expected future cash flows separated by commas. The first cash flow occurs at t=1, the next at t=2, and so on. The calculator returns the NPV, the present value of the future cash flows, the total undiscounted cash, and the profitability index.
The Formula Explained
NPV equals the negative of the initial outlay plus the sum of each future cash flow divided by (1 + r) raised to its period t. The discount rate \(r\) captures both the risk of the project and the opportunity cost of capital. The profitability index divides the present value of future cash flows by the initial investment, giving the value created per dollar invested.
$$\text{NPV} = -C_0 + \sum_{t=1}^{n} \frac{CF_t}{(1+r)^t}$$$$\text{PI} = \frac{\sum_{t=1}^{n} CF_t/(1+r)^t}{C_0}$$
Worked Example
Suppose you invest $1,000 today and receive $300, $400, $500, and $600 over the next four years at a 10% discount rate. Discounting each cash flow gives $$272.73 + 330.58 + 375.66 + 409.81 = 1{,}388.77.$$ Subtracting the $1,000 initial investment yields an NPV of about $388.77, with a profitability index of 1.389 — the project adds value.
FAQ
What discount rate should I use? A common choice is your weighted average cost of capital or a required rate of return that reflects the project's risk.
Why is the initial investment entered as a positive number? Enter it as a positive amount; the calculator automatically treats it as an outflow at t=0.
What does a profitability index above 1 mean? A PI greater than 1 indicates the present value of future cash flows exceeds the initial investment, signaling a worthwhile project.
