NPV Calculator
Net present value answers whether a project is worth doing once you account for the fact that future money is worth less than money today. It is the standard tool for capital decisions: buying equipment, launching a product line, or choosing between two contracts with different payment timings.
Inputs
Result
5,474.56
Value-adding project
How the npv calculator works
NPV = Σ CFt ÷ (1 + r)^t − initial investment, where CFt is the cash flow in period t and r is the discount rate.
The discount rate represents your cost of capital or required return. Raising it penalises distant cash flows heavily, which is why long-payback projects fail first when rates rise.
Decision rule: accept when NPV is positive, reject when negative. When comparing projects of similar size, the higher NPV wins.
Worked example: 100,000 machine, five years of savings
- Cash flows: 30,000 a year for five years. Discount rate: 10%.
- Discounted: 27,273 + 24,793 + 22,539 + 20,490 + 18,628 = 113,723.
- NPV = 113,723 − 100,000 = +13,723, so the purchase creates value.
- At a 15% discount rate the present value falls to 100,565 and NPV is barely positive.
- At 18% NPV turns negative — the project only works while capital is cheap.
Common mistakes to avoid
Picking a discount rate carelessly
NPV is extremely sensitive to r. Use your weighted average cost of capital or a genuine required return, and always test a rate a few points higher.
Including sunk costs
Money already spent is irrelevant to the decision. Only incremental future cash flows belong in the calculation.
Mixing nominal cash flows with a real discount rate
Either inflate the cash flows and discount at a nominal rate, or keep both in today's money. Mixing the two systematically overstates NPV.
Frequently asked questions
What does a negative NPV mean?
The project returns less than your required rate. It may still be cash-positive, but the capital would do better elsewhere at the same risk.
How is NPV different from IRR?
NPV gives value in currency at a chosen discount rate; IRR gives the rate at which NPV equals zero. NPV is the more reliable ranking tool for projects of different sizes.
What discount rate should a small business use?
Often the cost of borrowing plus a risk premium — commonly 10–15%. If the project is riskier than the business as a whole, go higher.
Should terminal value be included?
Yes, if the asset has resale value or the cash flows continue beyond the modelled period. Discount it like any other future amount.
Does NPV handle uneven cash flows?
Naturally — each period is discounted separately, so irregular or negative interim flows are handled without adjustment.
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