NPV calculator

What is Net Present Value (NPV)?

Net present value is the sum of all of an investment's future cash flows, each discounted back to today's value, minus the initial investment. It answers a simple but important question: is this investment worth more today, in present-value terms, than what it costs to make? A positive NPV means the investment is expected to add value; a negative NPV means it's expected to destroy value, even if the raw, undiscounted cash flows look large.

This calculator finds NPV from your initial investment, a discount rate, and the cash flows you expect in each future year, along with three other standard metrics used alongside it: IRR, payback period, and profitability index.

How to use it

1. Enter your initial investment, the upfront cost paid at the start (year 0).
2. Enter your discount rate, usually your cost of capital or a required rate of return.
3. Enter the expected cash flow for each year, click "+ Add year" to add more years as needed.
4. Click Calculate NPV to see the full breakdown, including IRR, payback period, and a year-by-year present value table.

Why discount future cash flows at all?

Money available today is worth more than the same amount received in the future, because today's money can be invested and start earning a return immediately, and because future cash flows carry risk and uncertainty. Discounting converts each future cash flow into its equivalent value in today's dollars, using the formula Present Value = Cash Flow ÷ (1 + rate)^year, so that cash flows from different years can be fairly compared and summed together.

The four metrics explained

• NPV - the total value added (or lost) by the investment in today's dollars, after accounting for the time value of money
• IRR (Internal Rate of Return) - the discount rate at which NPV would equal exactly zero, if your actual discount rate is lower than the IRR, the investment has a positive NPV and looks favorable
• Payback period - how many years it takes for the cumulative (undiscounted) cash flows to recover the initial investment, a simple measure of how quickly you get your money back
• Profitability index - the ratio of the present value of future cash flows to the initial investment, a value above 1.0 indicates a favorable investment on the same basis as a positive NPV

Choosing a discount rate

The discount rate should reflect the return you could reasonably expect from an alternative investment of similar risk, often called the cost of capital or required rate of return. A higher discount rate makes future cash flows worth less today, which lowers NPV, reflecting greater risk or a higher bar for what counts as a worthwhile investment. There's no universally correct rate, it depends on your specific situation, risk tolerance, and alternative opportunities.

Common uses

• Deciding whether a business investment, project, or piece of equipment is worth the upfront cost
• Comparing two or more investment opportunities with different cash flow patterns
• Evaluating whether to accept a business deal with payments spread over several years
• Academic and professional finance coursework involving capital budgeting
• Real estate or business acquisition analysis involving multi-year projected returns

Frequently asked questions

What does a negative NPV mean?

It means the investment is expected to return less than your required rate of return, in present-value terms, you'd generally be better off putting your money into an alternative with at least that rate of return instead.

Why might NPV and IRR disagree when comparing two investments?

NPV and IRR can occasionally rank two different investments differently, especially when they have very different cash flow sizes or timing. In most textbook guidance, NPV is considered the more reliable metric for decision-making when the two disagree, since it directly measures value added in dollar terms rather than a percentage rate.

Can cash flows be negative in a later year?

Yes, enter a negative number for any year where you expect a net cash outflow rather than inflow, the calculator handles negative yearly cash flows correctly in both the NPV and IRR calculations.

Is a higher IRR always better?

Generally yes, when comparing similar-sized investments, but IRR alone doesn't account for the total scale of value created, a small investment with a very high IRR might still create less total value than a larger investment with a more modest IRR, which is one reason NPV is often preferred for final decisions.