Net Present Value Calculator

Net present value is used compare the cash flows at a common time point which usually refers to present. In general, we define NPV as NPV = Present Value of Benefits - Present Value of Costs = Present Value of all cash flows. If the NPV is positive, it means there is a benefit of the investment, vice and versa.

Formula

\[NPV=\sum_{t=0}^{N} \frac{C_t}{(1+r)^t}\]where
C_t = Cash flows
r = Annual interest Rate
N = Total number of cash flow

In some cases, you may need different compound settings, and the calculator also provides such feature. The formula would become the following after Enable Compound Option is switched on.\[NPV=\sum_{t=0}^{N} \frac{C_t}{(1+\frac{r}{n})^{n \times t}}\]where
n = compound; eg. Monthly = 12, Annually = 1, Semi-Annually = 2, Quarterly = 4, Weekly = 52 and Biweekly = 104

Example Problem

You are a senior manager in a telcom company, deciding to develop a new generation signal emitter. Development will take 3 years and the cost is $120,000 per year. After the end of development, it is expected the emitter would make $60,000 per year for 7 years. Calculate the NPV of this investment, assuming all cash flows occurs at the end of each year and interest rate is 5%.

Since the cash flow occurs at the end of each year, inital investment (Y-0) should be 0. 3 years for developmenet and 7 years for post-developement. Therefore, 3+7=10 cash flows, including inflow and outflow, would be generated in this investment.

To get the answer with this calculator

• Set Interest Rate per Period as 5
• Set Payment Time as End
• Add cash flow, until Y-10 appear
• Y-0 should be 0 because all the cash flows occur at the end of the year, meaning the initial investment is zero.
• Input -120000 from Y-1 to Y-3
• Input 60000 from Y-4 to Y-10
• Click Calculate

The answer is -$26,880.55, which is a negative NPV. Therefore, you should not proceed this investment.