1. What is Net Present Value (NPV)?

Net Present Value (NPV) is a financial metric that calculates the present value of future cash flows minus the initial investment. It helps determine the profitability of an investment or project by considering the time value of money.

2. How Does the Calculator Work?

The calculator uses the NPV formula:

Where:

• \( CF_t \) — Cash flow at time period t (USD)
• \( r \) — Discount rate (%)
• \( t \) — Time period
• \( Initial \) — Initial investment (USD)

Explanation: The formula discounts each future cash flow back to its present value and sums them, then subtracts the initial investment.

3. Importance of NPV Calculation

Details: NPV is crucial for capital budgeting decisions. A positive NPV indicates a profitable investment, while negative NPV suggests the investment would lose money.

4. Using the Calculator

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

5. Frequently Asked Questions (FAQ)

Q1: What is a good NPV?
A: Any positive NPV is generally considered good as it indicates profitability. The higher the NPV, the better the investment.

Q2: How does discount rate affect NPV?
A: Higher discount rates reduce NPV as future cash flows are discounted more heavily. Lower rates increase NPV.

Q3: What's the difference between NPV and IRR?
A: NPV gives absolute dollar value while IRR calculates the percentage return rate that makes NPV zero.

Q4: Can NPV be negative?
A: Yes, negative NPV means the investment would lose money based on the inputs.

Q5: What are NPV's limitations?
A: NPV relies on accurate cash flow projections and discount rate estimation, which can be uncertain.