Net Present Value (NPV) Calculator
Calculates the net present value of a project with uniform annual cash flows and an optional terminal value. Use it to decide whether a capital investment creates or destroys value in today's dollars.
About this calculator
Net Present Value (NPV) measures an investment's worth in today's dollars by discounting all future cash flows back at a required rate of return. The formula used here is: NPV = CF × [1 − (1 + r)^(−n)] / r + TV / (1 + r)^n − I, where CF is the uniform annual cash flow, r is the discount rate (as a decimal), n is the project duration in years, TV is the terminal value at the end of year n, and I is the initial investment. The first term is the present value of an ordinary annuity (the stream of equal annual cash flows). The second term discounts the terminal value — a lump sum received at project end — back to today. Subtracting the initial investment gives NPV. A positive NPV means the project returns more than the required rate and creates value; a negative NPV destroys value. The discount rate is typically the weighted average cost of capital (WACC) or a hurdle rate.
How to use
You invest $50,000 today (I = $50,000) in a project that generates $12,000 per year (CF = $12,000) for 5 years (n = 5) at a 10% discount rate (r = 0.10) with a $5,000 terminal value (TV = $5,000). Step 1 — annuity PV: 12,000 × [1 − (1.10)^(−5)] / 0.10 = 12,000 × [1 − 0.6209] / 0.10 = 12,000 × 3.7908 = $45,490. Step 2 — terminal value PV: 5,000 / (1.10)^5 = 5,000 / 1.6105 = $3,105. Step 3 — NPV: $45,490 + $3,105 − $50,000 = −$1,405. The NPV is negative, so this project does not meet the 10% hurdle rate.
Frequently asked questions
What does a negative NPV mean for an investment decision?
A negative NPV means the present value of the project's future cash flows is less than the initial investment at the chosen discount rate, so the project is expected to destroy value. In other words, your capital would generate better returns by being invested elsewhere at the discount rate you used. A negative NPV does not necessarily mean the project loses money in absolute terms — it may still produce positive cash flows — but those flows are insufficient to meet the required rate of return. Investors and managers typically reject projects with negative NPVs unless strategic or non-financial factors (such as market entry or regulatory compliance) justify the shortfall.
How do I choose the right discount rate for an NPV calculation?
The discount rate should reflect the opportunity cost of capital and the risk of the specific investment. For corporate projects, companies commonly use their Weighted Average Cost of Capital (WACC), which blends the after-tax cost of debt and the cost of equity proportional to their shares in the capital structure. For riskier projects, a risk-adjusted rate or a higher hurdle rate is applied to account for uncertainty. Individual investors might use their expected portfolio return as the discount rate. Choosing too low a rate overstates NPV and may lead to accepting poor investments; too high a rate understates it and causes good opportunities to be rejected. Sensitivity analysis — recalculating NPV across a range of discount rates — is a best practice.
What is the difference between NPV and IRR when evaluating a project?
NPV and Internal Rate of Return (IRR) are complementary investment metrics. NPV tells you the dollar value added by a project in today's terms at a specific discount rate; IRR is the discount rate at which NPV equals zero. If a project's IRR exceeds the required rate of return (hurdle rate), the NPV will be positive — both metrics point to accepting the project. However, NPV is generally considered superior for comparing mutually exclusive projects because it measures absolute value creation, whereas IRR can be misleading when projects differ in scale or when cash flows change sign multiple times. NPV also assumes reinvestment of cash flows at the discount rate, which is usually more realistic than IRR's assumption of reinvestment at the IRR itself.