1. What is NPV?

Net Present Value (NPV) is the difference between the present value of cash inflows and outflows over a period of time. It's used in capital budgeting to analyze the profitability of an investment or project.

2. How Does the Calculator Work?

The calculator uses the NPV formula:

Where:

• \( CF_t \) — Cash flow at time period t (USD)
• \( r \) — Discount rate (decimal)
• \( t \) — Time period (unitless)
• Initial Cost — Initial investment cost (USD)

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

3. Importance of NPV Calculation

Details: NPV is a core financial metric that helps determine whether an investment will yield a positive return. A positive NPV indicates a profitable investment.

4. Using the Calculator

Tips: Enter initial cost in USD, discount rate as decimal (e.g., 0.05 for 5%), number of periods, and comma-separated cash flow values.

5. Frequently Asked Questions (FAQ)

Q1: What does a positive NPV mean?
A: A positive NPV indicates that the projected earnings (in present dollars) exceed the anticipated costs, making it a good investment.

Q2: How to choose the discount rate?
A: Typically use the company's cost of capital or a rate that reflects the investment's risk.

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

Q4: Should I accept projects with negative NPV?
A: Generally no, unless there are strategic reasons beyond direct financial returns.

Q5: How accurate are NPV calculations?
A: Accuracy depends on the reliability of cash flow projections and appropriate discount rate selection.