How do you calculate NPV?

Discount each future cash flow by dividing it by (1 + r) raised to the power of its year number, add those present values together, then subtract the initial investment. For $10,000 invested against inflows of $3,000, $4,000, $5,000, and $3,000 at 8%, NPV is $2,381.

What does a positive NPV mean?

That the project earns more than your discount rate — it creates value relative to the next best use of the money. A negative NPV means the same capital would do better elsewhere at comparable risk, and zero means the two options are equivalent.

Should I use NPV or IRR to choose between projects?

NPV, when they disagree. IRR ignores project size, assumes interim cash flows get reinvested at the IRR itself, and can give multiple answers when cash flows change sign more than once. NPV measures value created in actual dollars.

What discount rate should I use?

The return the money could earn elsewhere at similar risk — a company's weighted average cost of capital, your borrowing rate, or a personal hurdle rate. Because the result is highly sensitive to this figure, test a range of rates rather than committing to one.

NPV Calculator

Net present value of a project from its cash flows and your discount rate.

Quick answer

Net present value discounts every future cash flow back to today and subtracts the initial investment: NPV = −C₀ + Σ CFₜ ÷ (1 + r)ᵗ. A positive NPV means the project beats your discount rate, so it creates value relative to the next best use of the money.

Project cash flows

Initial investment

Cash flows by year

Discount rate

Net present value

$2,381

clears the discount rate — worth doing

Present value of inflows

$12,381

Profitability index

1.238

Undiscounted total

$5,000

IRR

18.03%

A dollar later is worth less than a dollar now

NPV discounts every future cash flow back to today's value and subtracts what you paid: NPV = −C₀ + Σ CFₜ ÷ (1 + r)ᵗ. The logic is opportunity cost — money tied up in this project can't earn your required return elsewhere. A positive NPV means the project beats that alternative, a negative one means it doesn't, and zero means you're indifferent.

Worked example: $10,000 for four years of returns

Invest $10,000 and receive $3,000, $4,000, $5,000, and $3,000 at the end of each of the next four years. Undiscounted that's a $5,000 profit. At an 8% discount rate the inflows are worth $12,381 today, so NPV is $2,381 — still clearly worthwhile, but only half what the raw numbers suggest. The profitability index of 1.238 says you get $1.24 of present value per dollar invested.

Choosing the discount rate

The discount rate is the decision, not the arithmetic. It should reflect what the money would otherwise earn at comparable risk — a company's weighted average cost of capital, a lender's rate, or a personal hurdle rate. Small changes swing the answer hard: the same project at 20% has a negative NPV. Because the rate is a judgement, run the calculation across a range rather than trusting one figure.

NPV vs. IRR

IRR is the discount rate at which NPV hits zero — here about 18.0%. It's intuitive because it's a percentage, but it can mislead: it ignores project scale, assumes interim cash flows are reinvested at the IRR itself, and can produce multiple answers when flows alternate sign. When the two disagree about which project to choose, NPV is the one to trust, because it measures value created in dollars.

What the model assumes

This treats cash flows as arriving in a lump at each year-end, which understates value slightly if money actually comes in monthly. It also assumes you can forecast those flows — in practice the estimates carry far more error than the discounting method. And it ignores taxes, inflation unless your rate is already real rather than nominal, and any option value in being able to delay, expand, or abandon the project later.

Frequently asked questions

How do you calculate NPV?: Discount each future cash flow by dividing it by (1 + r) raised to the power of its year number, add those present values together, then subtract the initial investment. For $10,000 invested against inflows of $3,000, $4,000, $5,000, and $3,000 at 8%, NPV is $2,381.
What does a positive NPV mean?: That the project earns more than your discount rate — it creates value relative to the next best use of the money. A negative NPV means the same capital would do better elsewhere at comparable risk, and zero means the two options are equivalent.
Should I use NPV or IRR to choose between projects?: NPV, when they disagree. IRR ignores project size, assumes interim cash flows get reinvested at the IRR itself, and can give multiple answers when cash flows change sign more than once. NPV measures value created in actual dollars.
What discount rate should I use?: The return the money could earn elsewhere at similar risk — a company's weighted average cost of capital, your borrowing rate, or a personal hurdle rate. Because the result is highly sensitive to this figure, test a range of rates rather than committing to one.

Sources & methodology