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NPV Calculator

IRR, Net Present Value and Payback Period From Your Yearly Cash Flows

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How the NPV and IRR Calculator works

This NPV calculator tests whether an investment is worth making. Enter a discount rate, the initial outlay and the cash flow for each year, and it returns the net present value, the internal rate of return, the payback period and the profitability index, with the discounted value of every year.

NPV calculator formula

Each year's cash flow is discounted back to today and the initial investment is subtracted. The NPV calculator uses:

NPV = −initial + Σ cash flow in year t ÷ (1 + rate)^t

A positive NPV means the project beats the discount rate. The IRR is the rate that makes NPV exactly zero, found by search. Payback is how many years the undiscounted cash flows take to repay the outlay.

Worked example: equal yearly flows

Spend 50,000 to receive 15,000 a year for 5 years, discounted at 8%. The NPV is 9,890.65, the IRR is 15.24%, the payback period is 3.33 years and the profitability index is 1.198, so the project clears the 8% hurdle comfortably.

Worked example: rising flows

Spend 100,000 to receive 20,000, 30,000, 40,000 and 50,000 over four years, at 10%. The NPV is 7,178.47, the IRR is 12.83% and payback comes at 3.20 years. Negative flows can be entered too, such as a refit in a later year.

NPV reference table

Discount factors for years 1 to 25 at 5%, 8%, 10% and 12%. Multiply a cash flow by its factor to get its present value.

Year 5% 8% 10% 12%
1 0.9524 0.9259 0.9091 0.8929
2 0.9070 0.8573 0.8264 0.7972
3 0.8638 0.7938 0.7513 0.7118
4 0.8227 0.7350 0.6830 0.6355
5 0.7835 0.6806 0.6209 0.5674
6 0.7462 0.6302 0.5645 0.5066
7 0.7107 0.5835 0.5132 0.4523
8 0.6768 0.5403 0.4665 0.4039
9 0.6446 0.5002 0.4241 0.3606
10 0.6139 0.4632 0.3855 0.3220
11 0.5847 0.4289 0.3505 0.2875
12 0.5568 0.3971 0.3186 0.2567
13 0.5303 0.3677 0.2897 0.2292
14 0.5051 0.3405 0.2633 0.2046
15 0.4810 0.3152 0.2394 0.1827
16 0.4581 0.2919 0.2176 0.1631
17 0.4363 0.2703 0.1978 0.1456
18 0.4155 0.2502 0.1799 0.1300
19 0.3957 0.2317 0.1635 0.1161
20 0.3769 0.2145 0.1486 0.1037
21 0.3589 0.1987 0.1351 0.0926
22 0.3418 0.1839 0.1228 0.0826
23 0.3256 0.1703 0.1117 0.0738
24 0.3101 0.1577 0.1015 0.0659
25 0.2953 0.1460 0.0923 0.0588

Quick answers

FAQ

What discount rate should I use?

Use your cost of capital or the return you could earn on another investment of similar risk. Businesses often use their weighted average cost of capital. A higher rate is stricter and lowers the NPV of distant cash flows.

When is IRR misleading?

IRR can mislead when cash flows change sign more than once, which can give several IRRs, or when comparing projects of very different sizes. NPV in money terms is usually the safer basis for choosing between projects.

Are cash flows at the start or end of each year?

The initial investment is at time zero and each listed cash flow is at the end of its year, which is the standard convention. The first number in the list is year 1, the second year 2, and so on.

Can I enter monthly cash flows?

Yes, if you also enter a monthly discount rate. Divide an annual rate by 12 as a close approximation. The payback and IRR are then in months rather than years.

See also: all Investing tools, Pay, Bills, Property, Debt, Saving.

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