1. What is Net Present Value (NPV)?

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 a projected investment or project.

2. How Does the Calculator Work?

The calculator uses the NPV formula:

Where:

• \( Initial \) — Initial investment amount
• \( CF_t \) — Cash flow at time period t
• \( r \) — Discount rate (interest rate)
• \( n \) — Number of time periods
• \( Salvage \) — Salvage value at end of period n

Explanation: The formula discounts all future cash flows (including the salvage value) back to their present value and subtracts the initial investment.

3. Importance of NPV Calculation

Details: NPV is a core financial metric that 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 the initial investment as a positive number (it will be subtracted in the formula). Cash flows can be positive (inflows) or negative (outflows). The discount rate should reflect your cost of capital or desired return rate.

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, making it a good investment.

Q2: How does salvage value affect NPV?
A: Salvage value increases the NPV as it represents additional cash inflow at the end of the project's life.

Q3: What discount rate should I use?
A: Typically, use your company's cost of capital or a rate that reflects the investment's risk level.

Q4: How accurate are NPV calculations?
A: Accuracy depends on the reliability of your cash flow projections and discount rate estimate.

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