Instructions for the Net Present Value Calculator (NPV):
1. Enter the discount rate (as a whole number, this calculator does the math to change the value to decimal form).
2. Enter "Cash-In" and "Cash-Out" in the appropriate boxes.
3. You do not need to complete the form, only fill in the values for the years you are seeking to calculate.
You can move from box to box using the tab key, the arrow keys, or by using the mouse.
Clear the calculator by clicking the Reset button.
This NPV calculator may be used to find the Internal Rate of Return (IRR) by iteratively changing the Discount Rate, noting the NPV and driving NPV toward zero. A simple plot may help in the approach to zero. Note that IRR, by definition, is the discount rate where Net Present Value (NPV)=0.
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- What is Net Present Value?
- Sample NPV Problem
Net Present Value is one of six common capital budgeting formulas used to assess the value of an investment. In capital budgeting the six common financials that are assessed are as follows:
- Accounting Rate of Return
- Net Present Value
- Profitablity Index
- Internal Rate of Return
- Modified Internal Rate of Return
- and Equivalent Annuity
NPV is the sum of your net cashflows(annual cash inflow minus cash outflows) over the period of years you wish to evaluate. To calculate NPV you will need to determine your discount rate (discount rate is the interest rate a financial institution is charged to borrow money from the federal government), estimated future cash inflows and outflows, and the number of years you would like to evaluate. It should be noted that the formula takes into account the time value of money and the concept that a dollar today is worth more than a dollar tomorrow.
If the NPV is greater than 0, then an investor should put their money in the project; however, if NPV is negative, they should just put their money in a savings account to accrue interest or find a different investment.
Rt is the net cashflows (estimated cash inflows minus cash outflows for the period being evaluated)
i is the discount rate, or interest rate that could be earned if the money were invested with a financial institution
t is time (for year 1, t would equal 1 and for year 2, t would equal 2, etc.)
This calculation can be done by hand by filling in each variable of the formula for the year being evaluated and then adding the results of all the years considered- the sum would be your net present value.
We hope this clarified NPV and helped you solve or evaluate your problem.
Mike has $10,000 to invest in new equipment for his business. The estimates for annual cashflows for this capital investment are as follows:
- Year 1: Cash in- $7,000; Cash out- $8,000
- Year 2: $9,000 ; $7,000
- Year 3: $11,000 ; $9,500
- Year 4: $14,000 ; $9,000
- Year 5: $15,000 ; $9,700
If he invests in additional equipment for his company his NPV is $1,456. Because it is greater than 0, he should invest.