Net Present Value Calculator

About the Net Present Value Calculator

Net present value discounts every future cash flow back to today and subtracts what the thing costs. Positive means it adds value; negative means it does not.

  NPV = Σ CFₜ ÷ (1 + r)ᵗ − initial outlay

NPV is usually presented as the rigorous answer — the grown-up alternative to payback period. It is better than payback, and it is only as rigorous as a number somebody picked out of the air.

So this calculator reports the NPV, and then it reports the discount rate at which your decision flips. If the answer survives the whole plausible range of rates, it is robust. If it flips at 7%, the entire analysis is an argument about whether the right rate is 6% or 8%, and it should be presented that way rather than as a conclusion.

How to Use the Net Present Value Calculator

The NPV calculator takes an outlay and up to six cash flows.

Enter the cost up front as a positive number, then the cash flow for each period. Leave unused periods at zero — trailing zeros are dropped rather than counted as years of nothing.

The discount rate is your cost of capital, or the return genuinely available on the next best use of the money.

Periods can be years, quarters or months. The calculator does not care, as long as the rate matches the period.

Step-by-Step Example

£50,000 up front, then £15,000, £18,000, £20,000 and £12,000. Discounted at 8%.

  15,000 in period 1  →  13,888.89
  18,000 in period 2  →  15,432.10
  20,000 in period 3  →  15,876.64
  12,000 in period 4  →   8,820.36
                         ─────────
                         54,017.99
  Less the outlay:      −50,000.00
                         ─────────
  NPV:                    4,017.99

£65,000 of cash flows, worth £54,018 once discounted, against £50,000 to buy them. The project adds £4,018 of value at 8%.

The Rate Is an Assumption, So Test It

Here is the same project at different rates:

The decision flips at 11.62%.

That is the number to argue about. If your cost of capital is 6%, this project clears comfortably and the exact rate hardly matters. If it is 11%, you are approving a project on the strength of a rounding decision.

A £4,018 NPV on a £50,000 outlay sounds like a decision. "Positive if our cost of capital is under 11.62%" is the honest version of the same statement, and it is far more useful to whoever has to sign it off.

Payback Period, and Why It Is Worse

Payback is the rival measure most people actually use, because it is easy. Both are shown here:

  Payback, plain cash:        2.85 periods
  Payback, discounted at 8%:  3.54 periods

Payback has two problems. The smaller one is that it ignores the time value of money — which the discounted version fixes.

The serious one is that it ignores everything after the payback date.

A project that repays in three years and then stops dead scores better on payback than one that repays in four years and then runs profitably for twenty. Payback ranks the first one higher. That is plainly the wrong answer, and no version of payback fixes it, because throwing away the tail is what payback is.

Use payback as a liquidity check — how long until the money is back — not as a measure of whether something is worth doing.

NPV Is Blind to Size

A positive NPV is not the same as a good use of money.

NPV is an absolute amount, so a large mediocre project will out-score a small excellent one every time. A £10m project returning £100,000 of NPV beats a £50,000 project returning £90,000 — on NPV.

The profitability index fixes the comparison: present value per pound committed.

  54,017.99 ÷ 50,000  =  1.08

Every £1.00 committed returns £1.08 of present value. When capital is limited and you are choosing between projects rather than approving a list, this is the figure to rank by.

Understanding Your Result

Net present value is the headline, at the rate you chose.

The cash flows shows the total, the discounted total, and the outlay — the three numbers the answer comes from.

Where the decision flips is the crossover rate, and the most informative line here.

Payback period gives both versions, for comparison rather than for deciding.

Worth knowing reports the profitability index, or, on a negative NPV, whether the rate or the project is the problem.

When Should You Use This Calculator?

Any capital decision with cash flows over several periods. Equipment, premises, a hire, a product line.

Comparing projects of different shapes. One with early returns against one with late ones — this is exactly what payback gets wrong.

Testing an assumption. Run the crossover and see whether your conclusion depends on it.

Checking someone else's business case. If it quotes an NPV without the discount rate, it is not a business case.

Common Mistakes

Treating NPV as objective. It is arithmetic applied to a judgement.

Using a discount rate because it was to hand. The default corporate 10% has ended a lot of good projects.

Deciding on payback. It discards the tail, which is often where the value is.

Ranking on NPV when capital is limited. Use the profitability index.

Forgetting that period one is discounted. Money arriving at the end of the first year is already worth less than the outlay you paid today.

Leaving out the terminal value. If the project has an asset worth something at the end, that belongs in the final cash flow.

Confusing NPV with IRR. The IRR is exactly the rate at which NPV is zero — which is why the crossover rate here matches what the IRR calculator reports for the same flows. NPV is the safer of the two, because it always gives one answer.

Every figure here is an estimate for planning, not financial advice.