Net Present Value (NPV) Calculator
Calculate the net present value of an investment by considering the time value of money.
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Table of Contents
NPV Formula
Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. It's used to analyze the profitability of an investment or project.
Where:
- Initial Investment = The initial cost of the investment
- Cash Flow = The cash flow for each period
- r = Discount rate (as a decimal)
- t = Time period
How to Calculate NPV
To calculate NPV, follow these steps:
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1Determine the initial investment amount
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2Identify the expected cash flows for each period
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3Determine the discount rate
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4Calculate the present value of each cash flow
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5Sum all present values and subtract the initial investment
Interpreting NPV Results
Positive NPV
The investment is expected to generate more value than its cost, making it potentially profitable.
Negative NPV
The investment is expected to generate less value than its cost, making it potentially unprofitable.
Zero NPV
The investment is expected to generate exactly the same value as its cost, making it a break-even proposition.
NPV - Practical Examples
Example 1 Basic Investment
Initial investment: $10,000
Cash flows: $3,000 per year for 5 years
Discount rate: 5%
NPV = -$10,000 + $3,000/(1.05) + $3,000/(1.05)² + $3,000/(1.05)³ + $3,000/(1.05)⁴ + $3,000/(1.05)⁵
Example 2 Growing Cash Flows
Initial investment: $20,000
Cash flows: $5,000, $6,000, $7,000, $8,000, $9,000
Discount rate: 7%
NPV = -$20,000 + $5,000/(1.07) + $6,000/(1.07)² + $7,000/(1.07)³ + $8,000/(1.07)⁴ + $9,000/(1.07)⁵