1. What is Net Present Value (NPV)?

Net Present Value (NPV) is a financial metric that calculates the present value of all future cash flows from an investment, minus the initial investment cost. 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 (as decimal)
• \( t \) — Time period (1, 2, 3...)
• Initial Investment — Upfront cost of the investment

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

3. Importance of NPV Calculation

Details: NPV is a fundamental tool in capital budgeting to evaluate investment profitability. A positive NPV indicates the investment would add value, while a negative NPV suggests it would subtract value.

4. Using the Calculator

Tips:

• Enter initial investment as a positive number
• Discount rate should be between 0 and 1 (e.g., 0.05 for 5%)
• Cash flows should be comma-separated (e.g., "100,200,300")
• First cash flow is assumed to be at the end of period 1

5. Frequently Asked Questions (FAQ)

Q1: What does a positive NPV mean?
A: A positive NPV indicates the investment is expected to generate more value than its cost, considering the time value of money.

Q2: How do I choose the discount rate?
A: The discount rate typically reflects the cost of capital or the required rate of return for the investment.

Q3: What's the difference between NPV and IRR?
A: NPV calculates dollar value, while IRR calculates the percentage return rate where NPV equals zero.

Q4: Should I always choose projects with highest NPV?
A: While NPV is important, other factors like risk, strategic alignment, and resource constraints should also be considered.

Q5: Can NPV be used for personal finance decisions?
A: Yes, NPV can help evaluate major purchases, education investments, or any decision with upfront costs and future benefits.