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 Calculator Work?

The calculator uses the NPV formula:

Where:

• \( CF_t \) — Cash flow at time period t
• \( r \) — Discount rate (decimal)
• \( t \) — Time period

Explanation: The formula discounts each future cash flow back to its present value and sums them all up.

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 discount rate as a decimal (e.g., 0.05 for 5%) and cash flows as comma or space separated values. The first cash flow is assumed to be at t=1.

5. Frequently Asked Questions (FAQ)

Q1: What discount rate should I use?
A: Typically, use your company's cost of capital or the required rate of return for the investment.

Q2: How does NPV differ from IRR?
A: NPV calculates absolute dollar value while IRR finds the rate of return where NPV equals zero.

Q3: Should I include the initial investment?
A: Yes, include it as the first (usually negative) cash flow at t=0 if applicable.

Q4: What are the limitations of NPV?
A: NPV assumes constant discount rate and that cash flows are reinvested at the discount rate.

Q5: How to interpret negative NPV?
A: Negative NPV suggests the investment would destroy value based on your discount rate assumptions.