NPV Calculator
Enter your project inputs to calculate Net Present Value (NPV) instantly.
Formula used: NPV = -Initial Investment + Σ [Cash Flowt / (1 + r)t]
If you are evaluating an investment, a side business, or a capital project, the net present value calculation formula helps you decide whether the expected future cash is worth the money you put in today.
What is Net Present Value (NPV)?
Net Present Value is the current value of all expected future cash inflows and outflows from a project, discounted at a required rate of return. In simple terms, NPV tells you whether a project creates value after accounting for time and risk.
- NPV > 0: Project is expected to add value.
- NPV = 0: Project is expected to break even at the chosen discount rate.
- NPV < 0: Project is expected to destroy value.
Net present value calculation formula
NPV = Σ (CFt / (1 + r)t)
or
NPV = -C0 + (CF1/(1+r)1) + (CF2/(1+r)2) + ... + (CFn/(1+r)n)
Where:
- C0 = initial investment (cash outflow at time 0)
- CFt = cash flow in period t
- r = discount rate (required return or cost of capital)
- t = period number (year 1, year 2, etc.)
- n = total number of periods
Step-by-step NPV calculation
1) Forecast expected cash flows
Estimate the project cash flows for each period. These estimates should reflect realistic operating assumptions, taxes, maintenance costs, and expected revenue.
2) Choose a discount rate
The discount rate represents required return and risk. Corporate projects often use weighted average cost of capital (WACC). Personal investments might use a target return, such as 8% or 10%.
3) Discount each future cash flow
Each future dollar is worth less than a dollar today. Convert each future cash flow into present value using:
Present Value = CFt / (1 + r)t
4) Add discounted cash flows and subtract initial cost
Sum all discounted cash flows, then subtract the initial investment. The result is your NPV.
Example calculation
Suppose you invest $10,000 today and expect cash inflows of $3,000, $3,500, $4,000, and $4,500 over four years, using a 10% discount rate:
- Year 1 PV = 3000 / 1.10 = 2727.27
- Year 2 PV = 3500 / 1.10² = 2892.56
- Year 3 PV = 4000 / 1.10³ = 3005.26
- Year 4 PV = 4500 / 1.10⁴ = 3073.56
Total PV of inflows = 11,698.65
NPV = 11,698.65 - 10,000 = $1,698.65
Since NPV is positive, the project clears the 10% required return and appears financially attractive.
Why the NPV formula is powerful
- It includes the time value of money.
- It uses all projected cash flows, not just payback timing.
- It gives a direct measure of value creation in currency terms.
Common mistakes when calculating NPV
- Using accounting profit instead of actual cash flows.
- Ignoring initial working capital or terminal value adjustments.
- Using an unrealistic discount rate.
- Mixing nominal cash flows with a real discount rate (or vice versa).
- Forgetting that year-0 cash flow should not be discounted.
NPV vs. other investment metrics
NPV vs. Payback Period
Payback tells you how quickly money returns, but ignores value after payback and usually ignores discounting. NPV is more complete for decision-making.
NPV vs. IRR
IRR is the rate where NPV = 0. It is useful, but NPV is usually better for comparing projects with different scales because NPV measures absolute value added.
Final takeaway
The net present value calculation formula is one of the best tools for evaluating whether an investment truly makes economic sense. If your assumptions are reasonable and your discount rate reflects risk, NPV gives a clear signal: positive NPV generally means proceed, while negative NPV means reconsider.