Use this calculator to determine the Net Present Value (NPV) of your investment. Enter the initial investment, cash flows, and discount rate to evaluate the profitability of your project.
Net Present Value (NPV) is a crucial financial metric used to evaluate the profitability of an investment or project. It considers the time value of money and provides a clear indication of whether an investment will result in a net profit or loss. This guide will walk you through the process of calculating NPV.
The formula for calculating NPV is:
$$NPV = -C_0 + \sum_{t=1}^{n} \frac{C_t}{(1+r)^t}$$
Where:
Let's calculate the NPV for a project with the following details:
Step 1: Calculate the present value of each cash flow
Year 1: $$PV_1 = \frac{4000}{(1 + 0.10)^1} = 3636.36$$
Year 2: $$PV_2 = \frac{4500}{(1 + 0.10)^2} = 3719.01$$
Year 3: $$PV_3 = \frac{5000}{(1 + 0.10)^3} = 3756.57$$
Step 2: Sum all present values and subtract the initial investment
$$NPV = -10000 + 3636.36 + 3719.01 + 3756.57 = 1111.94$$
Therefore, the NPV of this project is $1,111.94. Since the NPV is positive, this investment is potentially profitable.
This diagram illustrates the cash flows over time. The red bar represents the initial investment (negative cash flow), while the green bars represent the positive cash flows in subsequent years. The height of each bar is proportional to the present value of the cash flow.