NPV Calculator
Net Present Value Analysis
Investment Analysis
Initial cash outflow
Required rate of return
Understanding Net Present Value
Time Value of Money
Net Present Value (NPV) is based on a simple but powerful concept: a dollar today is worth more than a dollar tomorrow. NPV accounts for the time value of money by discounting future cash flows back to their present value. This gives you the true economic value of an investment in today's dollars.
The discount rate represents your required rate of return - what you could earn elsewhere with similar risk. If NPV is positive, the investment creates value. If negative, it destroys value. Simple as that.
Why NPV Matters
NPV is considered the gold standard for investment analysis because it considers both the timing and magnitude of cash flows. Unlike simpler metrics, NPV accounts for the fact that money earned earlier is more valuable than money earned later. This makes NPV essential for comparing projects with different cash flow patterns.
Smart investors use NPV with complementary metrics like IRR and payback period to make well-rounded investment decisions. NPV tells you whether an investment creates value, IRR tells you the return rate, and payback period tells you how long until you recover your investment.
NPV Best Practices
Calculating Accurate NPV
- Use realistic cash flow projections
- Choose appropriate discount rates based on risk
- Include all relevant cash flows including terminal value
- Consider inflation and tax implications
Common NPV Mistakes
- Using unrealistic discount rates (too high or too low)
- Ignoring working capital and operating costs
- Forgetting to include salvage value at the end
- Not performing sensitivity analysis on key assumptions