1. What is Net Present Value (NPV)?

NPV is a financial metric that calculates the present value of all future cash flows from an investment, minus the initial investment. It's used to analyze the profitability of a projected investment or project.

2. How Does the Calculator Work?

The calculator uses the NPV formula:

Where:

• \( CF_t \) — Cash flow at time period t
• \( r \) — Discount rate (decimal)
• \( t \) — Time period
• \( CF_0 \) — Initial investment

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 a core principle of capital budgeting. A positive NPV indicates the projected earnings exceed the anticipated costs (in present dollars), while a negative NPV suggests the investment would lose money.

4. Using the Calculator

Tips: Enter the discount rate as a decimal (e.g., 0.05 for 5%), the initial investment amount, number of periods, and each period's cash flow. All values must be valid numbers.

5. Frequently Asked Questions (FAQ)

Q1: What discount rate should I use?
A: Typically the company's cost of capital or a risk-adjusted rate. For personal finance, you might use an expected return rate.

Q2: How does NPV differ from IRR?
A: NPV calculates dollar value while IRR finds the percentage return rate where NPV equals zero. Both are important metrics.

Q3: What does a negative NPV mean?
A: The investment would lose money in present value terms and should typically be rejected.

Q4: How accurate is NPV analysis?
A: Accuracy depends on the reliability of cash flow projections and the appropriateness of the discount rate.

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