How to Use the Net Present Value (NPV) Calculator
Find the net present value of any investment using the NPV calculator above. Simply modify the forms and the charts and tables will propagate. Want to add more variables? Try clicking Edit Formula.
What is net present value used for?
Net present value is a common equation used to analyze the value or return of a capital investment. At a high level, it is the difference between the present cash value of an investment and the present value of the expected return on that investment.
When you calculate the net present value of a project, you can gain insight into whether that project is a good investment. Since a dollar today will not have the same value as a dollar in the future, NPV factors in the time value of money.
The calculation can be complex and it’s not a perfect solution. Yet, calculating the NPV is very common for large projects, business investments, and more.
How do I use the net present value (NPV) calculator?
The simplest way to calculate the NPV is by using the net present calculator above. All you have to do is input the required information such as the initial investment, lifetime of the project, and expected returns.
Once the information is in the NPV calculator, you will be able to see the NPV of your considered investment. Then, you can decide if it is the right move to make.
How do I calculate NPV?
It is possible to calculate the NPV of a project without using a net present value calculator, but it becomes more complex. To calculate NPV on your own, you will need the following details:
- C = cash flow, or the amount of money you will get in the future at a specific time
- r = discount rate, or the interest rate, expressed as a decimal
- n = number of time periods, usually years, that you will get returns on the project
The formula is as follows:
NPV = Cn/(1+r)t + Cn/(1+r)t + ….
Net present value can be very difficult to calculate manually. It gets more complex if there are many different expected returns over a long period of time. Using the NPV calculator above allows you to avoid doing complex calculations by hand.
What is the best net present value?
The higher the NPV, the better. If the net present value for project A is higher than the net present value for project B, then project A is likely the best investment. In theory, a good NPV is anything higher than 0. However, it’s best to aim for higher, giving your investment a healthy margin of safety.
If any of the assumptions used in your calculation are incorrect, then your NPV could change. If a current calculation returns something barely above 0, you’re at risk of missing targets when the actual returns come in down the line.
What does it mean when NPV is negative?
If the NPV calculator returns a negative number, it means that the project will not be profitable. When the return of the project does not make up for the initial investment, then the investment probably isn’t the best decision in its current state.
What is the difference between NPV and IRR?
The internal rate of return (IRR) uses the NPV formula to figure out the required discount rate to make the NPV equal to zero. With the IRR, you can compare the projected returns of investments with different time periods.
Though similar, calculating the NPV of an investment will return an actual dollar amount while the IRR will give a percentage value. Both of these calculations are helpful tools to explore before making investments.
Does NPV have any drawbacks?
Calculating the worthiness of an investment is never easy. The NPV calculation is not perfect. Though it provides helpful insight into the potential value of a project, it is heavily reliant on the inputs which are only ever estimates at best.
Projects that go many years into the future can often see very different results than anticipated, potentially making the original NPV calculation null and void.
Although the NPV calculation spits out a potential profitability number, it can be hard to compare two calculations. For instance, project A could have a higher NPV than project B, but NPV fails to show that project A requires an investment of 10x more money.
The potential drawbacks of this calculation, along with the fact that it can be very hard to calculate manually, make it imperfect. However, no calculation is ever perfect. If you can, use similar measurements like IRR in conjunction with NPV to get more data points to compare. Using multiple calculations will help you make the most informed investment decision.