1. What is Net Present Value?

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash 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:

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

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

3. Importance of NPV Calculation

Details: NPV is a core component of corporate finance and investment analysis. A positive NPV indicates that 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 as a positive number, discount rate as a decimal (e.g., 0.05 for 5%), number of periods, and comma-separated cash flows (e.g., "100,200,300").

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 absolute dollar value while IRR finds the rate of return where NPV equals zero. Both are important metrics.

Q3: What are the limitations of NPV?
A: NPV relies on accurate cash flow projections and discount rate estimation. It doesn't account for intangible benefits or strategic value.

Q4: How should I interpret a negative NPV?
A: Generally means the investment would destroy value based on your inputs. However, consider qualitative factors too.

Q5: Can NPV be used for comparing projects?
A: Yes, when comparing mutually exclusive projects, the one with higher NPV is typically preferred, assuming similar risk profiles.