What Is Net Present Value (NPV)?
Net Present Value converts a series of future cash flows into a single number in today's dollars, then subtracts the upfront cost required to generate them. If NPV is positive, the investment is projected to create more value than it costs, at your chosen discount rate. If NPV is negative, the investment is projected to destroy value — the future cash flows aren't worth enough today to justify the initial outlay.
Why Money Today Is Worth More Than Money Later
This is the "time value of money" — a dollar in your hand today can be invested and start earning a return immediately, so it's worth more than a dollar you won't receive until some future year. NPV builds this directly into the math by "discounting" each future cash flow: dividing it by (1 + discount rate) raised to the power of how many years away it is. The further out a cash flow is, and the higher the discount rate, the smaller its value looks today.
How to Use the NPV Calculator
- Enter your initial investment — the upfront cost, as a positive number.
- Enter your discount rate — your required rate of return or cost of capital.
- Enter the expected cash flow for each future year; use "+ Add Year" for a longer project, or remove rows you don't need.
- Read the NPV result, plus the per-period breakdown showing exactly how each year's cash flow was discounted.
How to Choose a Discount Rate
The discount rate should reflect your required rate of return, or "cost of capital" — the return you could reasonably expect from an alternative investment of similar risk. Businesses often use their weighted average cost of capital (WACC); individual investors sometimes use their expected portfolio return, or a hurdle rate that includes a margin for risk. A higher discount rate makes future cash flows worth less today, so riskier or less certain projects are typically evaluated with a higher rate.
NPV Formula
Worked Example
Discount factors at 10%: Year 1 = 0.9091, Year 2 = 0.8264, Year 3 = 0.7513, Year 4 = 0.6830, Year 5 = 0.6209.
Present value of each $15,000 cash flow: $13,636.36 + $12,396.69 + $11,269.72 + $10,245.20 + $9,313.82 = $56,861.79 total present value.
NPV = $56,861.79 − $50,000 = +$6,861.79.
Because NPV is positive, this investment is projected to be worth more, in today's dollars, than it costs — it clears the 10% required return with about $6,862 to spare.
Understanding Your Results
Net Present Value is the bottom-line figure: positive means value-adding at your discount rate, negative means value-destroying. PV of Cash Flows is the sum of all future cash flows discounted back to today, before subtracting the initial cost. Discount Factor shows exactly how much a given year's cash flow is "shrunk" to reflect its distance in time. Small changes in the discount rate can meaningfully move the NPV, especially for cash flows far in the future — it's worth testing a few different rates to see how sensitive your result is.
Important Considerations
- NPV is only as reliable as the cash flow estimates and discount rate you enter — garbage in, garbage out.
- This calculator assumes cash flows arrive at the end of each period; some real-world analyses use mid-year or beginning-of-period conventions instead.
- NPV doesn't automatically account for taxes, inflation (unless your cash flows and discount rate are both already in real or both in nominal terms consistently), or financing structure.
Common Mistakes to Avoid
- Mixing nominal cash flows with a real (inflation-adjusted) discount rate, or vice versa — keep both consistent.
- Using an unrealistically low discount rate to make a marginal project look attractive.
- Forgetting to enter the initial investment as a positive cost, which the calculator subtracts automatically.
Frequently Asked Questions
NPV gives you a dollar figure — how much value a project adds at a given discount rate. IRR (internal rate of return) instead solves for the discount rate at which NPV would equal exactly zero. NPV is generally considered more reliable for comparing projects of different sizes, since IRR can sometimes rank smaller, high-percentage-return projects above larger, more value-adding ones.
An NPV of zero means the investment is projected to earn exactly your discount rate — no more, no less. It neither adds nor destroys value relative to your required return; it's the break-even point, and the discount rate that produces exactly zero NPV is, by definition, the project's IRR.
Often very sensitive, especially when cash flows are spread far into the future — a higher discount rate shrinks distant cash flows much more than near-term ones. It's good practice to recalculate NPV at a few different discount rates to see how robust your conclusion is.
Typically your cost of capital or required rate of return for an investment of similar risk — often a company's weighted average cost of capital (WACC), or an individual's expected portfolio return plus a risk margin for less certain projects.
Generally yes, when comparing mutually exclusive projects with similar risk and the same discount rate — the higher NPV is preferred. Be cautious comparing projects of very different sizes or durations, where other metrics alongside NPV can add useful context.