What Net Present Value Tells You
Net Present Value (NPV) measures whether an investment is expected to create or destroy value by discounting all of its future cash flows back to today's money. Because a dollar received in the future is worth less than a dollar today — you could invest today's dollar and earn a return — each future cash flow is divided by (1 + r)^t, where r is the discount rate and t is the number of periods away. Summing these present values, including the initial investment as a negative cash flow at t=0, gives the NPV.
The decision rule is simple: accept a project when its NPV is positive and reject it when negative. A positive NPV means the project is expected to earn more than the discount rate, while a negative NPV means it is expected to fall short. NPV is widely considered the most theoretically sound capital-budgeting method because it accounts for the time value of money and the scale of the investment.
Reading the Result
The calculator lists each period's cash flow and its discounted present value, then sums them into the NPV. In the default example, an initial outlay of $100,000 followed by five annual inflows of $30,000 at a 10% discount rate produces an NPV of about $13,723 — positive, so the project is expected to add value. The undiscounted total cash flow is $50,000, but discounting reduces the future inflows enough that the present-value picture is what matters for the decision.
Practical Considerations
The discount rate should reflect the opportunity cost of capital — the return available on an alternative investment of similar risk. A higher discount rate reduces NPV, so the same project can look attractive at a low rate and unattractive at a high one. This calculator assumes cash flows occur at the end of each period and that the discount rate is constant. Results are estimates for illustration and not financial advice.