1. What is Net Present Value?

Net Present Value (NPV) is the difference between the present value of cash inflows and outflows over a period of time. It's used in capital budgeting to analyze the profitability of an investment or project.

2. How Does the NPV Calculator Work?

The calculator uses the NPV formula:

Where:

• \( C_0 \) — Initial investment (outflow)
• \( CF_t \) — Cash flow at time period t
• \( r \) — Discount rate (as decimal)
• \( t \) — Time period
• \( n \) — Number of periods

Explanation: The formula discounts future cash flows to their present value and subtracts the initial investment.

3. Importance of NPV Calculation

Details: NPV is the gold standard for investment appraisal. Positive NPV indicates profitable investment, while negative NPV suggests the investment would lose money.

4. Using the Calculator

Tips: Enter initial investment as positive number, discount rate as percentage, number of periods, and each period's cash flow (positive for inflows, negative for outflows).

5. Frequently Asked Questions (FAQ)

Q1: What discount rate should I use?
A: Typically use your company's weighted average cost of capital (WACC) or an appropriate hurdle rate.

Q2: How does NPV differ from IRR?
A: NPV gives absolute dollar value while IRR provides percentage return. NPV is generally preferred as it accounts for scale.

Q3: What are the limitations of NPV?
A: Requires accurate cash flow estimates and appropriate discount rate. Doesn't account for non-financial factors.

Q4: How to interpret NPV results?
A: NPV > 0 = profitable, NPV < 0 = unprofitable, NPV = 0 = break-even (returns exactly match discount rate).

Q5: Can NPV be used for comparing projects?
A: Yes, when comparing mutually exclusive projects, choose the one with higher NPV (accounting for scale differences).