Calculate the NPV of an investment

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Net Present Value tells you whether the cash flows from an investment are worth the upfront cost at your chosen discount rate.

Finance Standard Live Calculation Visual Breakdown

Investment details

Discount rate represents your opportunity cost — what alternative investments would have earned.

Initial investment

Annual cash flow (each year)

Discount rate (% p.a.)

Investment period (years)

Net Present Value

−₹45,206

Investment loses value at 10% discount rate

Initial investment₹5.00 L

Annual cash flow₹1.20 L

Discount rate10% p.a.

Period5 years

Total CF (undiscounted)₹6.00 L

PV of cash flows₹4.55 L

How NPV is calculated

NPV discounts each future cash flow back to today's value using the discount rate, then subtracts the initial investment. Positive NPV = value-creating; Negative NPV = destroys value.

01
Discount each flow
Each future cash flow is worth less today. Divide by (1+r)^t for year t.
```
PV_t = CF_t ÷ (1+r)^t
```
02
Sum all PVs
Add up the present value of every future cash flow.
```
PV_total = Σ PV_t  // for t = 1..n
```
03
Subtract investment
NPV = sum of PV − initial investment. Positive = invest. Negative = don't.
```
NPV = −P + PV_total
```

FormulaNPV = −P + Σ CF_t ÷ (1+r)^t for t = 1..nNPV > 0 means the investment beats the discount rate; NPV < 0 means it doesn't.

Why we use this formula by default.
Indian payroll convention, statutory references, and the SaaS tooling that runs payroll all converge on this approach. Below are the authoritative sources we cross-checked.

Theory

Damodaran NYU Stern

Canonical NPV / DCF valuation theory and applied examples.

Definition

Investopedia NPV

NPV formula reference with positive/negative interpretation.

Methodology

Corporate Finance Institute

CFI NPV decision-making framework and applied cases.

Tool

Excel NPV() Function

Standard NPV implementation in spreadsheet finance.

Practitioner

McKinsey Valuation

McKinsey's practitioner guide to corporate valuation.

Strategic

HBR NPV Articles

Harvard Business Review on strategic NPV application.

FAQs about NPV

What is a "good" NPV?

Any positive NPV is technically value-creating. Higher NPV = better. Compare NPV across alternatives to pick the best one. NPV depends critically on the discount rate — change the rate and the NPV changes.

What discount rate should I use?

Your opportunity cost — what equivalent alternative investments earn. For business investments: cost of capital (8-12%). For personal: expected return on alternative SIPs (10-14%). For risk-free comparison: G-Sec rates (~7%).

NPV vs IRR — which is better?

Both have uses. NPV gives a rupee amount (clearer for absolute decisions). IRR gives a % rate (easier to compare across opportunities). When they conflict, prefer NPV — it directly measures wealth created.

Can NPV be negative?

Yes — and it should change your decision. Negative NPV means the investment returns less than the discount rate. You'd be better off in the alternative. Walk away.

Does NPV account for inflation?

Use real (inflation-adjusted) discount rate if cash flows are real; use nominal discount rate if cash flows are nominal. Don't mix. Most analyses use nominal because most cash flow forecasts are nominal.

What about taxes in NPV?

Use after-tax cash flows and after-tax discount rate. Pre-tax NPV will overstate the true value-creation. Account for capital gains, depreciation tax shield, and tax on operating cash flows.

Is NPV used for personal financial decisions?

Yes. Buy vs rent: NPV the difference in cash flows. SIP vs FD: compare NPVs. Job offer NPV: salary + benefits, discounted. Even car lease vs purchase is an NPV question.

What if cash flows are not constant?

Sum each year's discounted cash flow individually. The formula generalises easily — just don't use the simplified constant-CF version. Real-world projects have lumpy cash flows.

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Calculate the NPV of an investment

Investment details

How NPV is calculated

Discount each flow

Sum all PVs

Subtract investment

Damodaran NYU Stern

Investopedia NPV

Corporate Finance Institute

Excel NPV() Function

McKinsey Valuation

HBR NPV Articles

FAQs about NPV

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