Net Present Value (NPV)

A printable cheatsheet with calculations
and notes

Download FREE Ratio Diagram

Instead of calculating each ratio individually

Let our ratio tool instantly calculate your ratios. Input your financial data once and get multiple results.
START AUTO CALCULATION

Net Present Value (NPV)

INTERPRETATION

Net Present Value is used to evaluate the amount of money an investment will generate compared with the cost adjusted for the time value of money.

In short, how much money you can expect to make from an investment in today’s dollars.

Business owners, managers, and other interested parties use this financial modeling method to calculate whether or not an investment will be profitable.

Note: expanded calculation

EXAMPLE

M&M is considering two potential projects:

Project A requires an initial investment of $35,000 but is expected to generate revenues of $10,000, $27,000, and $19,000 for the first, second, and third years, respectively. The target rate of return is 12%. Note that the cash inflows are uneven.

Project B also requires a $35,000 initial investment and will generate $27,000 annually for two years. The target rate remains 12%. Note that each period produces equal revenues.

Result: Both projects require the same initial investment, but Project A generates more total income than Project B. However, Project B has a higher NPV because income is generated faster (meaning that the discount rate has a smaller effect).

BENCHMARK: ROT

If the net present value of your project is positive, it’s profitable. If the NPV is negative, it’s unprofitable. And if the NPV equals zero, your project break-even.

When comparing multiple projects, the one with the largest NPV will provide the highest return.

Net Present Value (NPV):

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

DISCLAIMER: The interactive calculators on this site are self-help tools intended to help you visualize and explore your financial information. They are not intended to replace the advice of a qualified professional. Because each business is different, we can not guarantee accuracy.