1. What is Net Present Value (NPV)?

Net Present Value (NPV) is the difference between the present value of cash inflows and outflows over a period of time (10 years in this calculator). It's used in capital budgeting to analyze the profitability of an investment or project.

2. How Does the Calculator Work?

The calculator uses the NPV formula:

Where:

• \( CF_t \) — Cash flow at time t (years 1-10)
• \( r \) — Discount rate (as decimal)
• \( Initial \) — Initial investment amount

Explanation: The formula discounts future cash flows to their present value and subtracts the initial investment.

3. Importance of NPV Calculation

Details: NPV is a core financial metric that helps determine whether an investment will yield a positive return after accounting for the time value of money. A positive NPV indicates a profitable investment.

4. Using the Calculator

Tips: Enter the initial investment amount, discount rate (as decimal between 0 and 1), and cash flows for each of the 10 years. Select your currency for proper formatting.

5. Frequently Asked Questions (FAQ)

Q1: What discount rate should I use?
A: Typically use your company's weighted average cost of capital (WACC) or an appropriate hurdle rate for your investment.

Q2: What does a negative NPV mean?
A: A negative NPV suggests the investment would lose money in present value terms and should generally be avoided.

Q3: Why 10 years specifically?
A: 10 years is a common investment horizon, but you can adjust the calculator for different time periods as needed.

Q4: How accurate is this calculation?
A: The calculation is mathematically precise, but accuracy depends on the quality of your cash flow estimates and discount rate selection.

Q5: Can I use this for personal investments?
A: Yes, NPV can be used for any investment analysis where you can estimate future cash flows.