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's used to analyze the profitability of a projected investment or project.

2. How Does the NPV Calculator Work?

The calculator uses the NPV formula:

Where:

• \( CF_t \) — Cash flow at time period t
• \( r \) — Discount rate (decimal)
• \( t \) — Time period
• Initial Investment — Upfront cost of the project

Explanation: The formula discounts future cash flows to their present value and subtracts the initial investment.

3. Importance of NPV Calculation

Details: NPV is crucial for capital budgeting decisions. A positive NPV indicates the projected earnings exceed the anticipated costs, while a negative NPV suggests the investment would lose money.

4. Using the Calculator

Tips: Enter the initial investment amount, discount rate (as decimal, e.g., 0.05 for 5%), and comma-separated cash flows (e.g., "1000, 1500, 2000").

5. Frequently Asked Questions (FAQ)

Q1: What discount rate should I use?
A: Typically the company's cost of capital or required rate of return. For personal finance, use your opportunity cost.

Q2: How does NPV differ from IRR?
A: NPV calculates absolute dollar value while IRR finds the break-even rate of return. NPV is generally preferred.

Q3: What does a negative NPV mean?
A: A negative NPV suggests the investment would destroy value and should be rejected.

Q4: How accurate are NPV calculations?
A: Accuracy depends on the quality of cash flow estimates and appropriate discount rate selection.

Q5: Can NPV be used for comparing projects?
A: Yes, when comparing mutually exclusive projects, the one with higher NPV is generally preferred.