1. What is Net Present Value (NPV)?

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

2. How Does the Calculator Work?

The calculator uses the NPV formula:

Where:

• \( CF_0 \) — Initial investment (outflow, typically negative)
• \( CF_j \) — Cash flow at period j
• \( i \) — Discount rate (required rate of return)
• \( j \) — Time period
• \( n \) — Total number of periods

Explanation: The formula discounts all future cash flows back to their present value and sums them with the initial investment.

3. Importance of NPV Calculation

Details: NPV is the gold standard for investment decisions. A positive NPV indicates the projected earnings exceed the anticipated costs, while a negative NPV suggests the investment would lose money.

4. Using the Calculator

Tips: Enter the initial investment (often negative), discount rate (as decimal, e.g., 0.10 for 10%), number of periods, and each period's cash flow. All values must be valid.

5. Frequently Asked Questions (FAQ)

Q1: What discount rate should I use?
A: Typically the company's weighted average cost of capital (WACC) or a required rate of return that reflects the investment's risk.

Q2: How does NPV differ from IRR?
A: NPV calculates dollar value while IRR finds the percentage return rate where NPV equals zero. NPV is generally preferred.

Q3: What does a negative NPV mean?
A: The investment would lose money at the given discount rate and should typically be rejected.

Q4: How accurate are NPV calculations?
A: They're only as accurate as the cash flow projections and discount rate estimate. Sensitivity analysis is recommended.

Q5: Can NPV be used for comparing projects?
A: Yes, when comparing mutually exclusive projects, the one with the higher NPV is generally preferred.