Net present value answers one question: is this project worth more than it costs, once you account for the fact that money arriving later is worth less than money arriving now? Each future cash flow is divided by one plus the discount rate raised to the number of years until it arrives, and the discounted amounts are summed. Subtract the initial outlay and what remains is the value the project adds today.
The discount rate is the judgement call. It should reflect what the money could otherwise earn at comparable risk — a cost of capital, a hurdle rate, or simply the return on the next best alternative. A higher rate punishes distant cash flows severely, which is why long-dated projects are so sensitive to it. A positive NPV means the project beats that benchmark; a negative one means it does not.
On the defaults, $50,000 buys six years of $12,000 plus a $5,000 salvage value. Discounted at 8.0%, those inflows are worth $58,625.40 today, so the NPV is $8,625.40. The project also returns its cost in discounted terms after about 5.28 years.
The formula
CF<sub>t</sub>- Cash flow arriving in year t
r- Discount rate per year
t- Years until that cash flow arrives
C<sub>0</sub>- Cash paid out at the start
How to use this calculator
- Enter the up-front cost of the project.
- Enter the net cash the project throws off each year.
- Enter the project life and any salvage or terminal value at the end.
- Set the discount rate; the gauge shows the net present value.
Worked examples
$50,000 for 6 years of $12,000
Year one is worth $11,111.11 today, year two $10,288.07, and so on down to year six at $7,562.04. Adding all six plus the salvage value discounted to $3,150.85 gives $58,625.40, so the NPV after the $50,000 outlay is $8,625.40.
How sensitive it is to the discount rate
At 4% the same project has an NPV of $16,857; at 12% it falls to $1,870, and at 16% it turns negative at $-3,731. The rate at which NPV crosses zero is 13.26%, which is the internal rate of return.
How to read your score
Frequently asked questions
What discount rate should I use?
Whatever return you would otherwise get for the same risk. Companies typically use their weighted average cost of capital; an individual might use the expected return on a comparable investment. Because the answer swings on this number, test a range rather than trusting one figure.
Is a positive NPV always a yes?
It means the project beats the benchmark you set, which is a good sign, but not that it is the best available use of the money. If two projects both have positive NPVs and you can only fund one, take the larger NPV, or compare profitability indices if capital is the binding constraint.
What is the profitability index for?
It is present value divided by cost, so it measures value created per unit of capital. When you are rationing capital across many small projects, ranking by this ratio packs more total NPV into the budget than ranking by NPV alone.
Should I include depreciation in the cash flows?
No. Depreciation is an accounting allocation, not cash. Use actual cash in and out, including the tax saved because depreciation reduced taxable profit — that tax effect is real cash, the charge itself is not.
Why does the salvage value matter so little?
Because it arrives last and is discounted hardest. $5,000 in year 6 at 8.0% is worth only $3,150.85 today, about 63% of its face amount.
NPV sensitivity
| Discount rate | PV of inflows | NPV | Verdict |
|---|---|---|---|
| 4% | $66,857 | $16,857 | accept |
| 6% | $62,533 | $12,533 | accept |
| 8% | $58,625 | $8,625 | accept |
| 10% | $55,085 | $5,085 | accept |
| 12% | $51,870 | $1,870 | accept |
| 14% | $48,942 | $-1,058 | reject |
| 16% | $46,269 | $-3,731 | reject |
| 18% | $43,823 | $-6,177 | reject |
NPV crosses zero at 13.26% — the internal rate of return for this cash flow.