This Net Present Value calculator (NPV calculator) will compare the difference between the present values of cash outflow, compared to the present value of cash inflow. The result of this NPV calculation leads to a monetary return rate in dollar or currency value, rather than a percentage return rate as seen in the IRR calculation. Based on the comparison between the present values of cash outflow and present value of cash inflow, this method incorporates the time value of money consideration. Given the results is in currency terms (dollar) this is an absolute measure of the performance over a given time period.
Companies and businesses would use the NPV method for the evaluation and analysis of projects or investments that have either regular or irregular cashflows. Traditionally the use of the NPV measure is for longer duration projects or investments, and it recognizes more thoroughly the costs of capital or market return on investments.
One of the main inputs for the NPV calculator is the 'Discount Rate' which is the rate of interest, or the rate of return which is either owed each period for the loan, or which could be gained each period via alternative investments.
An example of how the NPV calculator below can help you with your net present value calculations can be seen in the following scenario. As with the example on the IRR calculator we look at a small printing business that is looking to purchase a new machine to facilitate growth within the local market. The NPV calculator below allows the user to run two scenarios side-by-side, so we can test both scenarios to work out which is the best option for the printing company base on the net present value (NPV) measure.
The first machine that we will profile is Machine A, which costs $150,000 NZD for the initial investment and has a 5-year working lifespan. In this case, we would use a discount rate of 10% because that is the interest cost for the loans in the two scenarios.
In Year 1 the cashflows are $30,000, in Year 2 the cashflows are $35,000, in Year 3 the cashflows are $45,000, in Year 4 the cashflows are $60,000 and in Year 5 the cashflows are $85,000.
Putting these values into the left-hand calculator below, we can see the NPV (Net Present Value) for Machine A over the 5-year period is +$33,767.
The second machine that we will profile is Machine B, which costs $250,000 NZD for the initial investment and has a 5-year working lifespan.
In Year 1 the cashflows are $55,000, in Year 2 the cashflows are $65,000, in Year 3 the cashflows are $77,000, in Year 4 the cashflows are $99,000 and in Year 5 the cashflows are $105,000.
Putting these values into the right-hand calculator below, we can see the NPV (Net Present Value) for Machine B over the 5-year period is +$44,385.
Based on the NPV results from above it looks like Machine B is the better of the two opportunities in this case, as the NPV result for the Machine A investment was +$33,767, whereas the Machine B result was +$44,385.
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