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If you are trying to assess whether a particular investment will bring you profit in the long term, this NPV calculator is a tool for you. Based on your initial investment and consecutive cash flows, it will determine the net present value, and hence the profitability, of a planned project.
In this article, we will help you understand the concept of net present value and provide step-by-step instructions on how to calculate NPV. We will also tell you how to interpret the result.
NPV is often used in company valuation – check out the discounted cash flow calculator for more details.
By definition, net present value is the difference between the present value of cash inflows and the present value of cash outflows for a given project.
To understand this definition, you first need to know what is the present value. Imagine that you want to have $2200 in your account next year. You know that the yearly interest rate on that account is 10%. It means that you need to put $2000 on that account today to have $2200 twelve months from now. The present value of "$2200 due in 12 months" is $2000.
You can notice that for a positive discount rate, the future value (FV – future value calculator) is always higher or equal to the present value (PV).
Following that logic, every project that needs your investment at the beginning and returns some money each year has a present value of each cash flow: the initial investment and every cash inflow. If you sum up all of these present values, you will get a net present value (NPV) of that project.
