Net Present Value Calculator
Definition – What is Net Present Value (NPV)?
Net Present Value (NPV) is the value in today’s dollars of a series of financial streams.
At its core, it combines multiple present value of a single sum calculations.
Formula – How NPV is calculated
Net Present Value is a combination of different future values from different times, all which are put into one larger present value.
Present Value = Value at Year X ÷ (1 + Rate of Return)Year X
The calculator is using a present value calculation for each different future value to bring the total amount to one date.
A project has a starting cost of $5,000 and will see revenue of $4,000 in year 4 and $9,000 in year 10. What is the net present value assuming a 2.2% annual rate of return?
Present Value of Year 4 Calculation:
Present Value of Year 4 = 4000 ÷ (1 + 0.022)4
Present Value of Year 4 = 4000 ÷ 1.0224
Present Value of Year 4 = 4000 ÷ 1.090947
Present Value of Year 4 = 3666.54
Present Value of Year 10 Calculation:
Present Value of Year 10 = 9000 ÷ (1 + 0.022)10
Present Value of Year 10 = 9000 ÷ 1.02210
Present Value of Year 10 = 9000 ÷ 1.243108
Present Value of Year 10 = 7239.92
Total of All Present Values:
Present Value of Year 4 + Present Value of Year 10= 10,906.46
The Initial Investment is a Negative Cash Out:
Present Value of Years 4 & 10 + Starting Investment = 10,906.46 + (-5,000)
Present Value of Years 4 + 10 + Starting Investment = 5,906.46
What is the difference between net present value and present value?
Present value calculates the present value of one future value amount. Net present value calculates the present value of multiple future value amounts.
At its core, Net Present Value is just a number of present value calculations added together.
What is the difference between net present value and net future value?
Net present value is the present value of a series of future values. Net future value is the future value of a series of income streams.
How does net present value handle an annuity, annuity due, or perpetuity?
This calculation does not include it.
Sources and External Resources
- Wikipedia – Time Value of Money & Net Present Value -Wikipedia entries including formulas and the net present value is calculated.
- Math is Fun – Net Present Value – An explanation of the net present value formula.
- Harvard Business Review – A Refresher on Net Present Value – A quick overview on NPV and how it is calculated.
- The Balance SMB – Net Present Value (NPV) as a Capital Budgeting Method – NPV can be used for a variety of uses, including capital budgeting.
- xplaind – Net Present Value (NPV) – A comprehensive explanation of NPV.
- Accounting Coach – What is NPV? – A short explanation of net present value.