## NPV Calculator

"Net Present Value is today's value for a project's lifetime of cash flows."

It is helpful if you understand the time value of money concept in order to fully understand this NPV calculator. It simply means that a dollar today is worth more than a dollar at any time in the future. How much less would a future cash flow be when brought back to the present? Well that depends on the discount rate or hurdle rate. It needs to be chosen wisely, because a low rate puts more value on the distant cash flows. A higher rate might be used to account for inflation and other risks to future cash flows. The reason for this is clear.

A dollar today can be invested for a return or used to payoff debt to reduce interest payments. A present value can be calculated for every cash flow that is projected to occur at a future date. If you net them all together you get the net present value. Here is a link to a definition of NPV. Also see Calculate NPV for a more in depth discussion.

This NPV calculator will calculate net present value for a series of cash flows. Net present value is what a series of cash flows in the future would be worth today as calculated using a discount rate that represents your minimum attractive rate of return. You might want to know the net present value of an income property (real estate, oil well, etc.), for example. The result would give you an estimate of the price at which the property could be bought or sold for (based on your minimum expected return - the discount rate or hurdle rate).

# The Net Present Value Calculator

You will see two series of cash flows. The first column or series is an example. The second column is where you can enter numbers to analyze. To obtain a NPV for your cash flows, you need to supply the actual cash flows from each project. You will also need to supply the discount rate. Be sure to clear out the numbers to zero for the years not needed. The year column can be changed by just changing the first year. Play close attention to the numbers that you put into your analysis. You don't want the expression "Garbage in, garbage out." to apply to an analysis that you are using to make an important business decision. For a more in depth explanation of how to use the calculator, watch the video below.

# What It Means

Use the net present value as a comparison number between projects. If cash flows are generating a present value higher than the investment, then the highest net present value wins. If you are generating present values of costs with little or no positive cash flow, then you want to chose the lowest present value.

## Possible Applications

Listed below are a few possible applications that you might use this business software for:

• Annuity Present Value - Find the present value of monthly or annual payments.
• Capital Budgeting - Differentiate between competing projects based on the best NPV score.
• NPV Investment or Investment Calculation - Determine how profitable a proposed investment will be.
• Discounted Cash Flow Analysis - Calculating the NPV will give one number for comparison between projects.
• Sensitivity Analysis - Different scenarios can be used to determine what the effect of different costs and revenues are.
• Optimization Analysis - Changing variables to maximize the present value.
• Net Present Worth - An older term which was used to mean net present value.

## Some Alternative Methods for Economic Comparison

NPV is the most used economic comparison, but not the only one. Other methods try to compensate for weaknesses in NPV.

• Cost Benefit Analysis (CBA) or Benefit Cost Analysis (BCA) - A method of examining the strengths and weaknesses of an alternative to determine which is most beneficial. Often uses NPV.
• Adjusted Present Value (APV) - This is a NPV calculation which considers the tax benefit of debt financing.
• Profitability Index (PI) or Profit Investment Ratio (PIR) - Is a ratio of the ration of the sums of the discounted cash inflows and outflows over the investment horizon divided by the initial cash outlay.
• Risk Adjusted NPV (rNPV) or Expected NPV (eNPV) - The future cash flows or fictitious capital, as they are sometimes called, are multiplied by the probability that they will really occur.
• Equivalent Annual Cost (EAC) - The NPV is converted to an annual cost (value) by using an annuity factor from a capitalization table. This technique is often used to compare alternatives that have equal risk, but unequal lives.
• Internal Rate of Return (IRR) - When the NPV=0 of a set of cash flows, the discount rate used is the effective rate of return or IRR. IRR is a more intuitive measure of economic excellence. It is similar to interest rate return from a savings account.
• Return on Investment (ROI) - Is a quick and dirty method of economic comparison. It is simply the ratio of returns over the investment without consideration of the time value of money.

## Summary

Once you have used the NPV calculator to calculate net present value for your projects, you can make a rational decision about which project is most economical for your situation.

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