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NPV Calculator

Calculate the net present value, discounted cash flows, and profitability index of capital projects.

%

Target annual hurdle rate or WACC

₹

Upfront capital spent at inception of project

Projected Annual Inflows
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Decision Rule

If NPV > 0, the project generates returns above the cost of capital and increases enterprise valuation. If NPV < 0, the project destroys economic value.

Results

Net Present Value (NPV)
₹38,877
PV of Future Inflows₹1,38,877
Initial Capital Outlay₹1,00,000
Profitability Index (PI)1.39
Total Undiscounted Inflows₹1,80,000
Net Undiscounted Gain₹80,000

Cash flows discounted by period: PV = CFt ÷ (1 + r)t.

Net Present Value (NPV) Formula

Net Present Value discounts each future cash flow back to its present day value at the investor's cost of capital:

NPV = −CF0 + ∑ [CFt ÷ (1 + r)t]

Where:
• CF0 = Initial investment cash outlay at time zero
• CFt = Net cash inflow generated in year t
• r = Annual hurdle discount rate (cost of capital)
• t = Time period in years (1 to n)
• Profitability Index = PV of Future Inflows ÷ CF0

Worked Example: Plant Modernization Project

An industrial manufacturer evaluates a ₹1,00,000 machinery upgrade yielding four years of projected net inflows at a 10% hurdle rate:

  • Year 1: ₹30,000 ÷ (1.10)1 = ₹27,272.73
  • Year 2: ₹40,000 ÷ (1.10)2 = ₹33,057.85
  • Year 3: ₹50,000 ÷ (1.10)3 = ₹37,565.74
  • Year 4: ₹60,000 ÷ (1.10)4 = ₹40,980.81
  • Total PV of Inflows: ₹27,272.73 + ₹33,057.85 + ₹37,565.74 + ₹40,980.81 = ₹1,38,877.13
  • Net Present Value (NPV): ₹1,38,877.13 − ₹1,00,000 = ₹38,877.13
  • Profitability Index (PI): ₹1,38,877.13 ÷ ₹1,00,000 = 1.39

Because the NPV is positive (+₹38,877) and PI exceeds 1.0, the machinery upgrade earns well above the 10% cost of capital and should be accepted.

Key Assumptions and Limitations

• Reinvestment Rate: Assumes all interim cash inflows can be reinvested throughout the project life at the discount rate.

• Cost of Capital Stability: Assumes a constant hurdle rate over the multi-year project horizon.

• Cash Flow Certainty: Future inflows are projections subject to commercial demand, pricing pressures, and macroeconomic shifts.

• Tax and Depreciation: Assumes cash flows represent post-tax net operational cash flows.

Evaluating mutually exclusive capital projects?When NPV and IRR give conflicting recommendations, read our authoritative guide: NPV vs. IRR: How to Resolve Conflicting Signals in Capital Budgeting to calculate Fisher's crossover rate and avoid the reinvestment rate trap.

Frequently asked questions

What does a positive Net Present Value (NPV) mean?
A positive NPV indicates that the projected cash inflows, discounted back to present value at the firm's required hurdle rate, exceed the initial capital investment outlay. This project will create net economic value for the company.
What discount rate should be used in NPV analysis?
Typically, the Weighted Average Cost of Capital (WACC) is used as the hurdle discount rate. For riskier capital projects, a risk premium is added to the base WACC.
What is the Profitability Index (PI)?
The Profitability Index is the ratio of the present value of future cash inflows divided by the initial investment outlay. A PI greater than 1.0 indicates a profitable project with positive NPV.
How does NPV compare to IRR?
NPV measures absolute dollar or currency value added to the firm, whereas IRR measures percentage rate of return. When ranking mutually exclusive projects with differing scales, NPV is considered the superior decision metric.
Can future cash flows be negative in NPV?
Yes. Major maintenance overhauls, equipment replacements, or decommissioning outlays can produce negative net cash flows in later project years, which are discounted appropriately.

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Net Present Value (NPV)

₹38,877