1. What is Net Present Value (NPV)?

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:

• \( CF_0 \) — Initial cash investment (usually negative)
• \( CF_t \) — Cash flow at time period t
• \( i \) — Discount rate (interest rate)
• \( t \) — Time period
• \( n \) — Total number of periods

Explanation: The formula discounts future cash flows back to their present value and sums them with the initial investment.

3. Importance of NPV Calculation

Details: NPV is a core component of capital budgeting and helps determine whether an investment will yield a positive return. A positive NPV indicates the projected earnings exceed the anticipated costs.

4. Using the Calculator

Tips: Enter initial cash flow (negative for investment), discount rate (as percentage), number of periods, and each period's cash flow. All values must be valid numbers.

5. Frequently Asked Questions (FAQ)

Q1: What does a positive NPV mean?
A: A positive NPV indicates that the projected earnings (in present dollars) exceed the anticipated costs, suggesting the investment would be profitable.

Q2: How does discount rate affect NPV?
A: Higher discount rates reduce the present value of future cash flows, typically resulting in lower NPV. The rate should reflect the risk of the investment.

Q3: What's the difference between NPV and IRR?
A: NPV calculates dollar value while IRR (Internal Rate of Return) calculates the percentage return rate where NPV equals zero.

Q4: Should I always choose projects with highest NPV?
A: While NPV is important, other factors like project scale, risk, and strategic alignment should also be considered.

Q5: Can NPV be negative?
A: Yes, a negative NPV suggests the investment would lose money and should typically be rejected.