1. What is Net Present Value?

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 NPV Calculator Work?

The calculator uses the NPV formula:

Where:

• \( C_t \) — Net cash inflow during period t
• \( r \) — Discount rate
• \( t \) — Time period
• \( C_0 \) — Initial investment

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

3. Importance of NPV Calculation

Details: NPV is the gold standard for investment decisions. Positive NPV indicates profitable investment, while negative NPV suggests the investment would lose money.

4. Using the Calculator

Tips: Enter initial investment as positive number, discount rate as percentage (e.g., 5 for 5%), and cash flows as comma-separated values (e.g., "1000,2000,3000").

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 does discount rate affect NPV?
A: Higher discount rates reduce NPV as future cash flows are discounted more heavily. Lower rates increase NPV.

Q3: What's a good NPV?
A: Any positive NPV is generally considered good, but companies often have minimum thresholds based on their cost of capital.

Q4: How does NPV compare to IRR?
A: NPV provides dollar value of return, while IRR gives percentage return. NPV is generally preferred as it accounts for scale.

Q5: What are limitations of NPV?
A: NPV relies on accurate cash flow projections and discount rate estimation. It also assumes cash flows are reinvested at the discount rate.