Net present value is one of the most common indicators and evaluation techniques for investments. It is used to assess investments in or determine the fair value of financial instruments. In companies, NPV is a popular way of comparing and evaluating different investment alternatives, e.g. comparing and selecting a machine or a project.

This calculator will help you determine the net present value for each investment. You can insert both a fixed discount rate that remains constant as well as a variable discount rate. The latter is particularly useful if you compare financial investments with a benchmark, i.e. an interest rate curve.

## The NPV Calculators

Determine which type of discount rate you like to use. You can select a fixed discount rate that remains constant over the entire time horizon of your forecast. Thus, one assumption about the discount rate would be enough.

Alternatively, you can choose ‘variable discount rate’. With this selection, you can define an individual discount rate for each period. This option is sensible if you assume changing interest rates or need to calculate the NPV against an interest rate curve.

Choose the type of discount rate and fill in the initial investment, discount rate(s), the net cash flows for each period and a residual value, if applicable.

The calculator will automatically determine the net present value.

### Calculator for Net Present Value (NPV) using a Constant Discount Rate

### Calculator for Net Present Value (NPV) using a Constant Discount Rate

## Required Input Data

To perform the calculation, you will need to provide the following input parameters:

### Discount Rate

If you use this calculator for annual cash flow projections, fill in the annualized discount rates. If you intend to use this calculator for monthly or quarterly cash flows, adjust the discount rate accordingly.

### Investment

The first cash flow in a series of cash flows is typically the investment. In this calculator, the investment is treated as occurring in period 0 while subsequent cash flows take place in periods 1, 2, 3, etc. Thus, the initial investment will not be discounted.

Enter the initial investment as a negative amount which represents an outflow.

### Net Cash Flow Forecast

You will need to project cash flows for the time horizon of the investment (the calculator supports max. 6 periods).

For financial investments, cash flows per period are normally interest, dividend and amortization payments less cost of the investment.

The cash flows of project and asset investments in companies will normally involve all internal and external costs and the expected benefits, e.g. revenues and revenue increases or savings.

The net cash flow is the sum of inflows less the sum of outflows per period.

### Residual Value

If the tenor of an investment exceeds the time horizon of the detailed cash flow forecast, a residual value represents the remaining value of an asset at the end of the projection. Typical examples of residual values are a perpetuity (i.e. an infinite annual return), a market value, disposal costs or salvation value.

## How Is the Net Present Value Calculated?

The Calculation of the NPV requires the following steps (source):

### Projecting Cash Flows

One of the key inputs is the series of net cash flows. Project the expected inflows and outflows of an investment.

Inflows may be dividends, interest payments, amortization, and, in case of physical assets any revenues and returns earned with those assets.

Outflows consist of all costs related to the investment. When you are assessing fixed assets, do not include depreciation here. The decline of value over time will be represented in the residual value which is the expected remaining value at the end of the forecast horizon.

### Assumptions of the NPV Calculation

Before you start calculating the NPV, you will need a couple of other assumptions, namely the discount rate and the residual value.

You can use a constant discount rate if you expect a flat interest rate curve that does not change over time. This approach is also common among companies assessing investments – they might use their cost of funds or their return rate expectation as a discount rate.

For financial investment, a comparison with market rates or other financial instruments’ returns may be more appropriate. In this case, the discount rate will differ among the projection periods.

You might also consider adding a ‘risk premium’ for later periods or for certain types of cash flows. If enterprises invest in fixed assets, for instance, certain elements of the outflows are certain (e.g. rental payments or maintenance cost) while projected revenues may be subject to some ambiguity. This can be represented by using a risk-adjusted interest rate for different types of cash flows.

You will also have to make a decision whether a residual value is to be taken into account. This is normally the case if the lifecycle of an investment goes beyond the end period of the detailed cash flow projection.

### Discounting Cash Flows and Calculate NPV

Lastly, the cash flows need to be discounted using the cash flows and the discount rate as defined in the previous steps.

#### The Net Present Value Formula

The formula to Calculate the Net Present value is:

In words: the net present value is the sum of the present values of each and every cash flows in your projection, calculated by using the applicable discount rate.

## Final thoughts

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