How to use this calculator
- Enter your Discount rate, the return you require or the cost of capital.
- List the Cash flows (year 0, 1, 2…) for year 0, 1, 2 and so on, separated by commas. The first is usually the negative initial outlay.
- Read the Net present value and the Internal rate of return.
- Check Discounted payback and the Profitability index, and use the table to see each year's present value.
How net present value works
Money received later is worth less than money received today, because you could invest today's money. NPV discounts every future cash flow back to today at your required rate and adds them up, with the outlay counted as negative.
NPV = Σ CFₜ / (1 + r)^t (t = 0 … N)- CFₜ = cash flow in year t (negative for money paid out)
- r = discount rate per year (as a decimal)
- t = year number; year 0 is today and is not discounted
- Profitability index = (NPV + initial outlay) ÷ initial outlay
A positive NPV means the project returns more than the discount rate; a negative NPV means it falls short. The IRR is the discount rate at which NPV equals zero.
Example: $50,000 project with five years of inflows
Cash flows are -$50,000, then $12,000, $15,000, $18,000, $20,000 and $15,000, discounted at 8%. The NPV is $13,169.52, the IRR is 16.97%, the discounted payback is 3.8 years and the profitability index is 1.26. Each dollar invested creates about $1.26 of present value.
At a 12% discount rate the NPV falls to $6,706 and payback to 4.21 years. At 17%, close to the IRR, NPV is about -$33, which is why the IRR is called the break-even rate.
The discount rate matters most
A single lump sum shows the time effect clearly: -$50,000 today and $80,000 in year five has an NPV of $4,447 at 8%, with a 9.86% IRR and payback in year 4.92. The cash is $30,000 higher, yet the project barely clears the hurdle because all the benefit arrives late.
Choose the rate as the return you could earn on a similar-risk alternative, plus a margin for risk. Check how the answer changes with the rate; use the IRR calculator for the break-even rate and the present value calculator for a single future amount.
How to decide with it
- Accept a standalone project if NPV is above zero at your discount rate.
- When choosing between projects, prefer higher NPV, and use the profitability index when money is limited.
- Compare IRR with the discount rate, but trust NPV when the two disagree, especially if cash flows change sign several times.
- Use discounted payback as a risk check: the sooner you recover the outlay, the less exposed you are to forecast errors.
- Run best, expected and worst cases; the forecast is usually the weakest part.
Assumptions and limits
The calculator treats each cash flow as arriving at the end of its year (year 0 is today) and uses one constant discount rate. It ignores taxes, inflation unless you build it into the flows, financing structure, and uncertainty in the forecasts themselves.
IRR can have no answer or multiple answers when cash flows change sign more than once. Use NPV results as an input to a decision, not the whole decision, and see the payback period calculator for a simple liquidity view.
Frequently asked questions
What is a good NPV?
Any NPV above zero means the project earns more than your discount rate. A larger NPV is better when comparing options of similar size and risk.
How do I choose a discount rate?
Use the return you could earn on an alternative of similar risk, or a company's cost of capital. Test a range, since the result is sensitive to this choice.
What is the difference between NPV and IRR?
NPV gives the value created in dollars at your required rate. IRR is the rate at which NPV becomes zero, which is a percentage and does not show scale.
Why is the first cash flow not discounted?
Because year 0 is today, so it is already in present-value terms. Later flows are divided by (1 + r) raised to their year.
Can NPV be used for personal decisions?
Yes, for example comparing an upfront cost against yearly savings from solar panels or a course. The same caveats about forecasts apply.