1. What is Net Present Value (NPV)?

Net Present Value (NPV) is a financial metric that calculates the present value of all future cash flows (both inflows and outflows) of an investment, discounted at a specific rate. It helps determine whether an investment is profitable or not.

2. How Does the NPV Calculator Work?

The calculator uses the NPV formula:

Where:

• \( CF_t \) — Cash flow at time period t
• \( r \) — Discount rate (as a decimal)
• \( t \) — Time period (from 0 to n)
• \( n \) — Total number of periods

Explanation: The formula discounts each future cash flow back to its present value and sums them all up. A positive NPV indicates a profitable investment.

3. Importance of NPV Calculation

Details: NPV is crucial for capital budgeting decisions. It accounts for the time value of money and provides a dollar amount that represents the net value added or lost by pursuing an investment.

4. Using the Calculator

Tips: Enter the discount rate as a percentage (e.g., 5 for 5%), specify the number of periods, and enter the cash flow for each period. Initial investments should be entered as negative values (outflows).

5. Frequently Asked Questions (FAQ)

Q1: What discount rate should I use?
A: Typically, use your company's cost of capital or the required rate of return for similar investments.

Q2: How does NPV differ from IRR?
A: NPV provides a dollar value of the investment's worth, while IRR gives the percentage return rate that makes NPV zero.

Q3: What does a negative NPV mean?
A: A negative NPV suggests the investment would lose money and should potentially be rejected.

Q4: Should I include all cash flows?
A: Yes, include all relevant cash inflows and outflows over the project's life, including initial investment and terminal value.

Q5: How accurate is NPV for decision making?
A: While powerful, NPV relies on accurate cash flow projections and discount rate estimation. Sensitivity analysis is recommended.