Net Present Value (NPV) Calculator
Evaluate the profitability of an investment by comparing the present value of future cash flows to the initial investment.
Cash Flows per Period ($)
Year 1:
Year 2:
Year 3:
Year 4:
Net Present Value (NPV):
$3,887.71
Profitable Investment
Cash Flow Analysis
Understanding Net Present Value (NPV)
Net Present Value (NPV) is a financial metric that seeks to find the present value of a series of future cash flows, both incoming and outgoing. It's a core part of capital budgeting and investment planning, used to analyze the profitability of a projected investment or project.
The Formula:
NPV = Σ [ (Cash Flow for period t) / (1 + r)^t ] - Initial Investment
- r: The discount rate, which could be the expected rate of return or the cost of capital.
- t: The time period of the cash flow.
How to Interpret NPV:
- Positive NPV: The investment is expected to be profitable. The projected earnings (in present dollars) exceed the projected costs.
- Negative NPV: The investment is expected to result in a net loss.
- Zero NPV: The investment is expected to break even. The project will generate exactly what is required to cover its costs.
NPV is a powerful tool because it considers the time value of money, meaning that a dollar today is worth more than a dollar tomorrow. By discounting future cash flows, NPV provides a realistic measure of an investment's value in today's terms.