What is Net Present Value?
Net Present Value (NPV) is the difference between the present value of future cash inflows and the cost of an investment, discounted at your required rate of return. It answers a fundamental question: in today's dollars, does this investment create or destroy value?
A positive NPV means the investment is expected to generate more value than it costs — it exceeds your required return. A negative NPV means the opposite. NPV is considered the gold standard in capital budgeting because it directly measures value creation in dollar terms.
How to use this calculator
Enter your discount rate (required rate of return), your initial investment as Year 0, and then add expected cash flows for each future year. The calculator returns the total NPV — positive means the investment clears your hurdle, negative means it doesn't.
Frequently Asked Questions
What discount rate should I use?
The discount rate should reflect the opportunity cost of your capital — the return you could earn on an investment of similar risk. For corporate projects, this is often the Weighted Average Cost of Capital (WACC). For personal investments, use your expected return from an alternative (e.g., 7–10% for a stock market alternative). Higher risk projects warrant higher discount rates.
What does a positive NPV mean?
A positive NPV means the investment is expected to generate more value than your required return, in today's dollars. For example, an NPV of $5,000 means you'd expect to be $5,000 richer (in present value terms) by taking this investment rather than the alternative represented by your discount rate.
When should I use NPV vs IRR?
Use NPV when comparing mutually exclusive projects or when you want to know the absolute dollar value created. Use IRR when you want a quick percentage return to compare against a hurdle rate. When they conflict, NPV is generally more reliable — IRR can be misleading when project sizes differ or when cash flows change sign multiple times.
How does compounding frequency affect NPV?
This calculator uses annual discounting. If your cash flows are monthly, convert your annual discount rate to a monthly rate (divide by 12 for an approximation, or use (1 + r)^(1/12) − 1 for exactness) and treat each month as a period.