An NPV Calculator is a simple online tool that helps in estimating whether something is worth investing in or not. In other words, it estimates the profitability by discounting the value of future cash flows. This article covers NPV, its calculation, and the calculator in detail.
What is an NPV value?
Net Present Value (NPV) is a capital budgeting technique that determines the profitability of an investment. It is the difference between the money invested today and the present value of all future cash flows.
NPV considers time value of money as an important factor. This means money is worth more today than it is in tomorrow. Experts use NPV to determine whether an investment is profitable. Also, companies use it to determine whether or not they have to take up a new project. They discount the future cash flows to the present day and then subtract the initial investment from the sum of all discounted cash flows. If the value is positive, they will invest in the said investment. If it is negative, they will reject it. In case the NPV is zero, they will be indifferent to it.
How to calculate a net present value?
Net Present Value (NPV) is determined by discounting all the future cash flows from an investment and then subtracting the initial investment. Following is the formula for calculating NPV:
NPV = (C1/(1+r)^t1 + C2/(1+r)^t2 …. + Cn/(1+r)^tn) – Initial Investment
Where, C1, C2, Cn, are cash flows for time periods 1, 2, until n number of years; r is the discount rate; t1, t2, tn are the different time periods.
The initial investment is the amount invested in the project.
The cash flows from the project are usually known to the prospective investor. And the discount rate is determined by considering the return on investment of an investment with a similar cost of borrowing or similar risk.
Let us take an example of an investment with an initial outlay of INR 50,000. The projected cash flows from the project for the next five years are INR 10,000, INR 20,000, INR 40,000, INR 20,000 and INR 5,000. The rate of return from a similar investment is 12%. One can use the NPV formula for calculating the Net Present Value of this investment.
NPV = (10000/(1+.12)^1 + 20000/(1+.12)^2 + 40000/(1+.12)^3 + 20000/(1+.12)^4 + 5000/(1+.12)^5) – 50000
Net Present Value = 68,891 – 50,000
NPV = INR 18,891.
What is Scripbox’s NPV calculator?
A net present value calculator is a tool that estimates the value of an investment as of today. The NPV calculator considers the expenses, revenue, and capital costs to determine the worth of an investment or project. It helps in determining if it is worth pursuing an investment. To calculate net present value, the calculator uses the following formula:
NPV = (C1/(1+r)^t1 + C2/(1+r)^t2 …. + Cn/(1+r)^tn) – Initial Investment.
Scripbox’s NPV calculator requires individuals to input the following details:
- Initial Investment: The amount that an individual wishes to invest at the start of the tenure.
- Discount Rate: It is the rate that an individual can expect from an investment, or it is the cost of borrowing money.
- Number of years: It is the tenure of the investment.
- Nature of Cash inflows: An individual can choose between yearly fixed cash inflows or yearly variable cash inflows.
- Investment amount: Depending on the cash inflows’ nature, one has to enter their investment amount.
The NPV calculator computes the following outputs on the basis of the above inputs:
- The present value of cash inflows
- Net Present Value
Net Present Value calculator helps in decision making. It is a capital budgeting technique that takes into the concept of the time value of money. The NPV of investment helps in the decision of whether to pursue an investment or a project. Following are the three outcomes of an NPV calculation:
Positive NPV: A positive NPV indicates that the present value of cash inflows is greater than the present value of cash outflows. Therefore, this is an ideal scenario for an investment opportunity.
Negative NPV: A negatives NPV indicates that the present value of cash inflows is lower than the present value of cash outflows. The scenario is not ideal for any investments. Therefore, no project or investment with a negative NPV should be accepted.
NPV = 0: A zero NPV indicates that the present value of cash inflows is equal to the present value of cash outflows. Therefore, one may or may not accept investment or project.
How to use Scripbox’s NPV calculator?
Scripbox’s Net Present Value NPV Calculator is available online and is free to use. One can calculate the present value of cash inflows using this calculator. To determine the net present value of an investment, one has to visit the Scripbox website. Scripbox uses the NPV formula to calculate net present value.
The following steps help one to use the Scripbox’s NPV Calculator:
Open the Scripbox’s NPV calculator.
Input the following details:
- Initial investment amount
- Discount Rate
- Number of years
- And, choose the nature of cash inflows: Yearly fixed cash inflows or Yearly variable cash inflows.
- Investment amount: Depending on the nature of the cash inflows, enter the fixed investment amount or a variable amount for every year.
The Scripbox’s NPV calculator then computes the following outputs:
- Present Value of Cash Inflows
- Net Present Value
Benefits of using NPV calculator
Following are the benefits of net present value calculator:
Ease of use
The NPV calculator helps to estimate the net present value of cash inflows and the net present value of an investment or project.
The calculator provides accurate results. However, it is important to note that an investment’s net present value is just an estimation. Moreover, the NPV calculator does not guarantee returns. Therefore, one should only use the calculator to estimate the net present value of their cash inflows.
The calculator determines the net present value within seconds. It saves time for an individual from doing complex calculations.
Better Investment Planning
By computing the net present value of the cash inflows from a project or investment, one can better strategize their investment planning and achieve financial goals. In other words, one can determine the opportunity cost of an investment, and one can plan for investments that can earn inflation-beating returns.
Free to use
The net present value calculator is available online on Scripbox’s website and also is free to use. Therefore, one can use the calculator to estimate the net present value of an investment option across multiple scenarios. Using the calculator to compare multiple scenarios will help an individual in making a better investment decision.
How is a net present value different from IRR?
Net present value is the difference between the present value of future expected cash inflows and the present value of cash outflows. On the other hand, the Internal Rate of Return (IRR) is the rate at which the net present value of cash inflows is equal to the net present value of cash outflows.
|Parameter||Net Present Value NPV||Internal Rate of Return IRR|
|Meaning||The present value of all cash flows of a project or investment is known as NPV.||IRR is the rate at which the cash inflow is equal to cash outflow. In other words, it is the interest rate at which the Net Present Value of an investment is zero.|
|Represented in||Absolute terms||Percentage terms|
|Indicates||Surplus from an investment or project||Break-even point – no profit or no loss|
|Rate for reinvestment||Uses cost of capital rate||Internal Rate of Return|
|Variable Cash outflows||Will not affect the NPV.||Will result in negative or multiple IRR|
How to interpret the net present value?
The Net Present Value is a profitability indicator that helps investors gauge the investment based on the profits it offers. While estimating the NPV, one needs to discount the future cash flows from the investment. And finally, subtract the initial investment from the discounted cash flows to estimate the profit or loss from the investment.
The outcome of NPV is either positive, negative or zero.
- A positive NPV indicates that the present value of the future projected cash flows is higher than the investment made. Hence, one can consider investing in investment.
- A negative NPV indicates that the present value of future expected cash flows is lower than the investment made. Hence, one shouldn’t invest in the investment.
- If the NPV is zero, then the present value of the future expected cash flows is equal to the investment made, and hence one can choose to or not choose to invest in it.
NPV is an excellent indicator for comparing two or more projects. When comparing two investments, companies often calculate NPV of both. They go with the one with higher profitability.
Let’s take an example to understand this better. There are two projects, A and B, which require a similar investment of INR 1,00,000. The discount rate for both the projects is 13%. Below are the expected cash flows of both the projects for the next five years.
|Year||Project A||Project B|
To calculate the net cash flows or NPV of the above two projects, one can use the following formula:
NPV = (C1/(1+r)^t1 + C2/(1+r)^t2 …. + Cn/(1+r)^tn) – Initial Investment.
The net cash flows from project A is INR 20,989, and the net cash flows from project B is INR 3,107. Since the NPV of project A is higher than Project B, it is more profitable. Hence one will end up choosing project A for investing.