FinanceInvestment AppraisalA-Level
CambridgeAQAIBAbiturAPBaccalauréat GénéralBachilleratoCAPS

Net Present Value (NPV) Calculator

Difference between PV of inflows and PV of outflows.

Use the free calculatorCheck the variablesOpen the advanced solver
Open Advanced Calculator
This is the free calculator preview. Advanced walkthroughs stay in the app.
Result
Ready
Net Present Value

Formula first

Overview

Net Present Value (NPV) is a fundamental financial metric used to evaluate the profitability of an investment by calculating the difference between the present value of cash inflows and the initial capital outlay. It accounts for the time value of money, ensuring that future cash flows are discounted to reflect their current worth in today's terms.

Symbols

Variables

NPV = Net Present Value, PV_f = PV of Inflows, INV = Initial Investment

NPV
Net Present Value
£
PV of Inflows
£
INV
Initial Investment
£

Apply it well

When To Use

When to use: Use NPV when comparing mutually exclusive projects or determining if a single investment will add value to a firm. It assumes that cash flows are reinvested at the discount rate and requires an accurate estimation of future revenue and a specific hurdle rate.

Why it matters: NPV is considered the gold standard of investment appraisal because it provides a direct measure of the expected increase in net wealth. It helps managers avoid projects that destroy value and aligns corporate decisions with the goal of maximizing shareholder returns.

Avoid these traps

Common Mistakes

  • Forgetting to subtract the initial investment.
  • Convert units and scales before substituting, especially when the inputs mix £.
  • Interpret the answer with its unit and context; a percentage, rate, ratio, and physical quantity do not mean the same thing.

One free problem

Practice Problem

A tech startup is considering a new server cluster costing 50,000. The total present value of all expected future cash inflows (PVF) is calculated to be 65,000. Calculate the Net Present Value.

PV of Inflows65000 £
Initial Investment50000 £

Solve for: NPV

Hint: Subtract the initial investment from the total present value of the inflows.

The full worked solution stays in the interactive walkthrough.

References

Sources

  1. Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen
  2. Corporate Finance by Stephen A. Ross, Randolph W. Westerfield, Jeffrey F. Jaffe
  3. Wikipedia: Net present value
  4. Brealey, Myers, and Allen, Principles of Corporate Finance
  5. Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance (12th ed.). McGraw-Hill Education.
  6. AQA A-level Business, Unit 3: Financial Performance and Investment Appraisal