Net Present Value Calculator
This net present value calculator adds up all cash flows of an investment discounted to today. Example: a 10,000 investment, an 8% rate and inflows of 3,000, 4,000, 5,000 and 2,000 give an NPV of 1,646.35.
Source: Wikipedia – Net present value (Formel, Entscheidungsregel; Lehrbuch: Brealey/Myers/Allen, Principles of Corporate Finance). Updated: .
How it is calculated
The net present value (NPV) is the sum of all cash flows of an investment discounted to today. It reflects the time value of money: a euro arriving in three years is worth less today than a euro now. Under the NPV rule, an investment is financially attractive on paper when its NPV is positive.
Formula
NPV = −I₀ + Σ CFₜ / (1 + i)ᵗ, for t = 1 to n. All cash flows are assumed at year end, and the investment I₀ occurs at time 0. The rate i is usually the cost of capital or the required return, for instance from a WACC.
Worked example
Investment 10,000, rate 8%, inflows 3,000, 4,000, 5,000 and 2,000. Present values: 3,000 / 1.08 = 2,777.78; 4,000 / 1.08² = 3,429.36; 5,000 / 1.08³ = 3,969.16; 2,000 / 1.08⁴ = 1,470.06. The sum of 11,646.35 minus 10,000 gives an NPV of 1,646.35.
- A higher rate lowers the NPV; the rate at which it becomes zero is the internal rate of return.
- Enter negative cash flows in later years, such as follow-up investments, with a minus sign.
- Taxes and inflation are not included unless they are part of your cash flows.
Frequently asked questions
How do you calculate net present value?
Divide each cash flow by (1 + rate) to the power of the year, add the present values and subtract the initial investment. In the example: 11,646.35 − 10,000 = 1,646.35.
What does a positive NPV mean?
At the chosen discount rate, the present value of the inflows exceeds the investment. On paper the investment is attractive; that is not investment advice.
How do I choose the discount rate?
Usually the required return or the company’s cost of capital. Try several values to see how sensitive the NPV is.
Sources and legal basis
- Wikipedia – Net present value (Formel, Entscheidungsregel; Lehrbuch: Brealey/Myers/Allen, Principles of Corporate Finance)
- Wikipedia – Kapitalwertmethode
As of: · Editorial policy
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