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:

• \( CF_t \) — Cash flow at time period t
• \( RRR \) — Required rate of return (decimal)
• \( t \) — Time period
• \( Initial \) — Initial investment

Explanation: The formula discounts future cash flows to their present value using the required rate of return, then subtracts the initial investment.

3. Importance of NPV Calculation

Details: NPV is a core financial metric that helps determine whether an investment will yield a positive return after accounting for the time value of money.

4. Using the Calculator

Tips: Enter the initial investment, required rate of return (as decimal), number of periods, and comma-separated cash flows for each period.

5. Frequently Asked Questions (FAQ)

Q1: What does a positive NPV mean?
A: A positive NPV indicates that the projected earnings exceed the anticipated costs, making it a potentially profitable investment.

Q2: How does the required rate of return affect NPV?
A: Higher RRR reduces the present value of future cash flows, typically resulting in lower NPV.

Q3: What's the difference between NPV and IRR?
A: NPV calculates dollar value while IRR calculates the percentage return rate where NPV equals zero.

Q4: Should I always choose projects with highest NPV?
A: While higher NPV is generally better, other factors like risk, strategic alignment, and resource availability should also be considered.

Q5: Can NPV be negative?
A: Yes, negative NPV suggests the investment would lose money based on the given RRR and cash flow projections.