Scenario presets
Inputs
Results
No data
- Net present value
- -
- Profitability index
- -
- PV of future cash flows
- -
- Internal rate of return
- -
- Payback period
- -
- Discounted payback
- -
NPV by discount rate and cash flow scale
| Rate \ Cash flows | -20% | -10% | Base | +10% | +20% |
|---|
Profitability index by investment and discount rate
| Investment \ Rate | -20% | -10% | Base | +10% | +20% |
|---|
Formulas and worked example
- NPV = sum of CFt / (1 + r)t - Initial investment
- Profitability index = PV of future cash flows / Initial investment
- IRR is the rate where NPV equals zero
A $100,000 machine returns $30,000, $35,000, $40,000 and $45,000 over four years at a 10% discount rate. Discounted cash flows total $116,987, so NPV is $16,987 and the profitability index is 1.170. Simple payback is 2.88 years.
Self-check quiz
1. A project should be accepted when NPV is:
2. Raising the discount rate generally:
3. A profitability index of 1.0 means NPV is:
Frequently asked questions
What is net present value?
Net present value is the sum of a project's future cash flows discounted to today at the required rate of return, minus the initial investment. A positive NPV means the project earns more than the required return.
How is the profitability index calculated?
The profitability index equals the present value of future cash flows divided by the initial investment. A value above 1.0 corresponds to a positive NPV.
Why can NPV and IRR give different rankings?
IRR is a percentage while NPV is a dollar amount, so projects of different size or cash flow timing can rank differently. When they conflict, NPV is usually preferred because it measures value created in dollars.
What discount rate should I use for NPV?
Use the project's required rate of return, typically the company's weighted average cost of capital adjusted for the project's risk.