NPV Calculator
Net present value discounts future cash flows back to what they are worth today, so you can judge whether a project earns more than the money would elsewhere.
Formula
NPV = Σ ( cash flow in year t ÷ (1 + r)ᵗ ) − initial cost
- r = discount rate
- t = the year the cash arrives
- Positive NPV means the project beats the discount rate
£1,000 a year for 5 years against £3,500 cost, at 10%: NPV £291
The Formula
NPV = ∑ [ Cash flowt ÷ (1 + r)t ] − Initial investment
Where r is the discount rate and t the period number.
Investing £10,000 for returns of £3,000, £4,000 and £5,000 over three years at an 8% discount rate gives an NPV of about £176.
That total of £12,000 looks like a £2,000 profit until discounting reveals it barely clears the hurdle.
Reading the Result
- NPV above zero: the project returns more than your discount rate; accept it.
- NPV of zero: it returns exactly the discount rate.
- NPV below zero: the money would do better elsewhere at that rate.
NPV is expressed in currency, so it also tells you how much value is created, which percentage measures do not.
Everything Depends on the Discount Rate
The discount rate is the assumption that decides the answer, and small changes flip decisions. It should reflect your cost of capital or the return available on comparable risk — a riskier project deserves a higher rate.
Because the same project can show positive NPV at 6% and negative at 10%, it is worth testing a range rather than trusting a single figure. The rate at which NPV reaches exactly zero is the internal rate of return.
Quick Reference
| Discount rate | NPV | Verdict |
|---|---|---|
| 5% | £829 | Accept |
| 8% | £493 | Accept |
| 10% | £291 | Accept |
| 12% | £105 | Marginal |
| 15% | −£148 | Reject |
Frequently Asked Questions
- What does a positive NPV mean?
- The project is expected to return more than your discount rate, so it creates value compared with the alternative use of the money.
- What discount rate should I use?
- Your cost of capital, or the return available on an investment of similar risk. Higher risk justifies a higher rate.
- What is the difference between NPV and IRR?
- NPV gives the value created in currency at a chosen rate. IRR gives the rate at which NPV would be zero. NPV is generally the more reliable decision tool.
- Why discount future cash flows at all?
- Money available now can be invested, so a pound next year is worth less than a pound today. Discounting puts all the flows on a comparable footing.