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:

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

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 crucial for investment 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 for each period. All values must be valid (positive numbers).

5. Frequently Asked Questions (FAQ)

Q1: What discount rate should I use?
A: Typically, use your company's weighted average cost of capital (WACC) or an appropriate hurdle rate for your investment.

Q2: What does a positive NPV mean?
A: A positive NPV indicates the investment is expected to generate more value than it costs and would be profitable.

Q3: How accurate is NPV for decision making?
A: While NPV is a powerful tool, it depends on accurate cash flow projections and appropriate discount rate selection.

Q4: Should I always choose the project with highest NPV?
A: Generally yes, but you should also consider other factors like risk, strategic alignment, and resource availability.

Q5: Can NPV be negative?
A: Yes, a negative NPV suggests the investment would lose money and should typically be rejected.