Net Present Value (NPV) Calculator Explained:
(a) What is this? Net Present Value (NPV) calculates the value of an investment by using the discount (interest) rate and incomes and expenses.
(b) What does this tell me? The NPV establishes the difference between the present value of the cash inflows and the present value of cash outflows. For example, an investment of $10,000 today at 10% will provide $11,000 at the end of the year. Therefore the present value $11,000 at the desired rate of return (10%) is $10,000. The amount of investment ($10,000 in this example) is deducted from this figure to arrive at the NPV which here is zero ($10,000 - $10,000). A zero NPV means the project repays the original investment plus the required rate of return. A positive NPV shows a better return, negative is a worse return than zero NPV.
(c) Why should I use it? To help determine whether or not an investment is worthwhile. The NPV is a simple to use and understand method of determining whether an investment is worthwhile. Above zero is good, the further it is above zero the better it is.
(d) Caution: This is a very basic NPV model. Usually they are much more complex. You should take the advice of your financial advisor regarding any investment decision. You use this calculator at your own risk.