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
• \( r \) — Discount rate (decimal)
• \( t \) — 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 discount rate as decimal (e.g., 0.05 for 5%), initial investment, number of periods, and each period's cash flow. Negative values represent outflows.

5. Frequently Asked Questions (FAQ)

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

Q2: How does NPV differ from IRR?
A: NPV gives absolute dollar value while IRR provides percentage return. NPV is generally preferred as it accounts for scale.

Q3: What does negative NPV mean?
A: Negative NPV suggests the investment would destroy value based on your discount rate. You should reject such projects.

Q4: Can NPV be used for comparing projects?
A: Yes, when comparing mutually exclusive projects, choose the one with higher NPV (assuming same scale).

Q5: What are NPV's limitations?
A: Requires accurate cash flow estimates and appropriate discount rate. Doesn't account for project size or flexibility.