What Is Net Present Value(NPV) Calculator?

NPV = (Present value of cash flows) – (Initial Investment)

It is a comprehensive evaluation technique as it takes into account the effect of time on the cash flows and also the cost of capital or the hurdle rate.

HOW TO CALCULATE NPV USING NPV CALCULATOR?

The NPV calculator helps you to calculate the NPV of a project or investment in quick time. But it is important to understand how the process flow of this NPV works. Let us put down some key points.

• The net present value calculator or NPV calculator is a simulation which shows you the value of an investment at present.
• The NPV calculator takes into account the expenses, revenues and capital costs to determine the worth of an investment or a project.
• The first step is to project your cash flows, which is always on a net basis. Your cash flow is your revenue flows, less revenue expenses, less provision for capital depreciation.
• The next step is to identify the hurdle rate or the cost of capital. If you investment is funded by debt and equity, then you must take the weighted average cost of debt and equity as the discount rate for calculating the NPV.
• The other way is to use the cash flows to calculate the IRR of the project. Then compare the IRR of the project or the investment with other similar projects and see if the returns are higher and hence is the project is justified.

The NPV calculator helps you to decide if an investment or a project is worth it or not. The net present value is a pure financial metrics and you need to apply other non-financial parameters also before taking a final decision on the project. That is the gist of the NPV calculator.

Once the NPV is calculated, you have 3 possible outcomes.

• In the event of Positive NPV, the present value of cash inflows is greater than the present value of cash outflows. This is an ideal investment
• In the case of Negative NPV present value of cash inflows is less than present value of cash outflows. Such projects are hard to accept and to even justify internally
• In a situation of zero NPV, the outcome is ambiguous. Normally, most project managers insist on margin of safety, i.e., substantial positive NPV to okay a project.

WHAT ARE THE USES OF NPV?

Here are some of the popular uses of NPV as calculated by the NPV Calculator.

• The NPV Calculator tells you quickly whether the project or investment is worth it or not at the current cash flows.
• The NPV Calculator is a quick summation of the time value adjusted returns of the investment or a project.
• The NPV Calculator very eloquently tells you as to how much is the money in the future, worth today.
• Very importantly, the NPV Calculator helps you measure the opportunity cost of an investment. You can plan the investments to earn inflation-beating returns.
• If you know the future value of your investments, you can make better and more optimal investment decisions. That is where the NPV Calculator comes in handy.