NPV & IRR Calculator: Investment Project Analysis

Table of Contents - Npv Irr

How to Use This Calculator
The Core Principle: Time Value of Money
How to Calculate NPV and IRR Manually
Real-World Applications
Scenarios People Actually Run Into
Trade-Offs and Decisions People Underestimate
Common Mistakes and How to Recover
Related Topics
How This Calculator Works
FAQs

How to Use This Calculator - Npv Irr

Enter your Initial Investment as a positive number—the upfront cost of the project.

Enter your Discount Rate as a percentage—your required return or cost of capital.

Add Cash Flows for each future period. Use positive numbers for inflows (revenue, savings) and negative numbers for outflows (additional costs). Add or remove periods as needed.

Click "Calculate" to see results. The output displays:

Net Present Value (NPV) in dollars
Internal Rate of Return (IRR) as a percentage
Profitability Index (PI)
Payback Period in years
Year-by-year breakdown of discounted cash flows

A positive NPV indicates the project creates value; IRR exceeding your discount rate confirms viability.

The Core Principle: Time Value of Money

A dollar today is worth more than a dollar tomorrow. This fundamental principle drives capital budgeting decisions. NPV and IRR quantify this relationship.

Net Present Value (NPV) calculates the present value of all future cash flows minus the initial investment: NPV = Σ [CFₜ / (1 + r)ᵗ] - Initial Investment

A positive NPV means the project returns more than your required rate—it creates value. A negative NPV destroys value.

Internal Rate of Return (IRR) is the discount rate that makes NPV exactly zero: 0 = Σ [CFₜ / (1 + IRR)ᵗ] - Initial Investment

If IRR exceeds your required return (hurdle rate), the project is acceptable. IRR represents the project's effective yield.

These metrics transform uncertain future cash flows into present-value terms, enabling comparison across projects with different timing and magnitudes.

How to Calculate NPV and IRR Manually

NPV calculation example: Initial investment: $100,000 Cash flows: $30,000/year for 5 years Discount rate: 10%

NPV = -100,000 + 30,000/1.1 + 30,000/1.1² + 30,000/1.1³ + 30,000/1.1⁴ + 30,000/1.1⁵ NPV = -100,000 + 27,273 + 24,793 + 22,539 + 20,490 + 18,628 NPV = $13,723

Since NPV > 0, accept the project.

Profitability Index: PI = (NPV + Initial Investment) / Initial Investment PI = (13,723 + 100,000) / 100,000 = 1.14

Each dollar invested returns $1.14 in present value.

IRR calculation (iterative): Find the rate where NPV = 0. Start with a guess and adjust:

At 10%: NPV = $13,723 (positive, try higher rate)
At 15%: NPV = $500 (positive, try higher)
At 15.2%: NPV ≈ 0

IRR ≈ 15.2%. Since IRR > 10% hurdle rate, accept.

Payback Period: Cumulative cash flows: Year 1: $30,000 Year 2: $60,000 Year 3: $90,000 Year 4: $120,000

Payback occurs between years 3 and 4. Exact payback = 3 + (100,000 - 90,000)/30,000 = 3.33 years

Real-World Applications

Equipment purchase decisions. Should you buy a $50,000 machine that saves $15,000/year for 5 years? Calculate NPV at your cost of capital to decide.

Project prioritization. With limited capital, rank projects by profitability index. PI accounts for both return and investment size.

Lease versus buy analysis. Model both scenarios as cash flows. Compare NPVs to determine which option creates more value.

Business acquisition valuation. Project future cash flows from an acquisition target. NPV indicates maximum purchase price you should pay.

Real estate investment. Calculate NPV of rental income minus expenses, discounted at your required return. Compare to purchase price.

New product launch. Model development costs, marketing expenses, and projected revenues. NPV indicates whether the product justifies investment.

Scenarios People Actually Run Into

The competing projects dilemma. Project A: $100K investment, IRR 25%. Project B: $500K investment, IRR 18%. IRR favors A, but B's larger NPV ($75K vs $20K) might create more total value.

The multiple IRR problem. A project with alternating positive and negative cash flows (investment, returns, then major cleanup costs) may have multiple IRRs or none. NPV remains reliable.

The reinvestment assumption. IRR implicitly assumes cash flows are reinvested at the IRR rate. NPV assumes reinvestment at the discount rate—usually more realistic.

The timing sensitivity. Two projects with identical total cash flows but different timing produce different NPVs. Earlier cash flows are more valuable.

The discount rate uncertainty. At 8% discount rate, NPV is positive; at 12%, it's negative. Your decision depends on getting the discount rate right.

Trade-Offs and Decisions People Underestimate

NPV versus IRR. NPV measures absolute value creation; IRR measures percentage return. For mutually exclusive projects, trust NPV. For go/no-go decisions, both work.

Discount rate selection. Too low overvalues projects; too high rejects good opportunities. Use weighted average cost of capital (WACC) for corporate projects.

Cash flow estimation uncertainty. NPV and IRR are only as good as your cash flow projections. Sensitivity analysis reveals how errors affect decisions.

Project scale differences. A 50% IRR on a $10,000 project creates less value than 15% IRR on a $1,000,000 project. Don't compare IRRs across scales.

Sunk costs. Already-spent money shouldn't affect NPV calculations. Only include incremental future cash flows.

Common Mistakes and How to Recover

Ignoring opportunity cost. Your discount rate should reflect what you'd earn on the next-best alternative. Using too low a rate accepts marginal projects.

Forgetting terminal value. Long-term projects often have significant residual value. Include asset salvage or ongoing cash flows beyond the explicit forecast period.

Double-counting. If depreciation is included in cash flow projections, don't also deduct the asset cost again. Work with after-tax cash flows, not accounting profits.

Mixing real and nominal. If cash flows include inflation, use a nominal discount rate. If cash flows are real (constant dollars), use a real rate.

IRR for non-conventional cash flows. If signs change more than once, IRR may not exist or may have multiple values. Use NPV instead.

How This Calculator Works

NPV calculation:

npv = -initialInvestment
for each period t:
  npv += cashFlow[t] / (1 + discountRate)^t

IRR calculation (Newton-Raphson method):

rate = 0.1 (initial guess)
repeat:
  npv = sum of [cashFlow[t] / (1 + rate)^t] - initialInvestment
  dnpv = derivative of npv with respect to rate
  rate = rate - npv / dnpv
until |npv| &lt; tolerance or max iterations reached

Profitability Index:

PI = (npv + initialInvestment) / initialInvestment

Payback Period:

cumulative = 0
for each period t:
  cumulative += cashFlow[t]
  if cumulative >= initialInvestment:
    payback = t - 1 + (remaining / cashFlow[t])
    break

All calculations happen locally in your browser.

FAQs

What is a good IRR?

An IRR exceeding your hurdle rate (cost of capital) is "good." For moderate-risk corporate projects, 10-15% is typical. Venture capital expects 25%+. Compare to your specific required return.

Why is NPV better than IRR?

NPV measures absolute value creation in dollars. IRR can mislead when comparing projects of different sizes or with non-conventional cash flows. For mutually exclusive projects, maximize NPV.

Can I use this for irregular cash flows?

Yes. Enter cash flows in chronological order. For irregular timing (not annual), consider XIRR, which accounts for specific dates.

What if my cash flows change sign multiple times?

You may get multiple IRRs or no valid IRR. In these cases, rely on NPV—it remains valid regardless of cash flow pattern.

How do I choose a discount rate?

Use your cost of capital. For businesses, this is typically WACC. For individuals, use the expected return on alternative investments plus a risk premium.

Does this account for taxes?

No—input after-tax cash flows. Calculate tax effects separately before entering cash flows.

What's the difference between PI and NPV?

NPV shows total value added. PI shows value per dollar invested. Use PI when capital is rationed; use NPV when maximizing total value.

How accurate is this for real decisions?

Mathematically precise. The quality of your decision depends on the accuracy of cash flow estimates. Always perform sensitivity analysis.

What is MIRR and when should I use it?

Modified Internal Rate of Return addresses IRR's reinvestment assumption by explicitly specifying finance and reinvestment rates. Use MIRR when you believe cash flows are reinvested at your cost of capital rather than the project's IRR.

How do I handle projects with different lifespans?

Compare using NPV per year (NPV ÷ years) or calculate the equivalent annual annuity. This normalizes value creation across different time horizons.

What if I have multiple projects and limited capital?

Rank by Profitability Index (PI) when capital is rationed. Fund projects with highest PI first until capital is exhausted. This maximizes value per dollar invested.

How do terminal values affect the calculation?

For long-term projects, most value often comes from the terminal value (residual value at project end). Be conservative with terminal assumptions—small changes significantly impact NPV.

What's the relationship between NPV and stock prices?

Theoretically, a positive NPV project should increase company value (and stock price) by the NPV amount. In practice, market reactions depend on expectations already priced in.

How do taxes affect NPV calculations?

Use after-tax cash flows. Tax shields from depreciation increase cash flows; tax on profits decreases them. Model taxes explicitly for accurate analysis.

What's the difference between nominal and real discount rates?

Real rates exclude inflation; nominal rates include it. If cash flows are in current dollars (increasing with inflation), use nominal rates. If cash flows are in constant dollars, use real rates.

How do I incorporate risk into NPV analysis?

Three approaches: increase the discount rate for riskier projects, use probability-weighted scenarios to calculate expected cash flows, or perform Monte Carlo simulation for comprehensive risk analysis.

What is economic value added (EVA)?

EVA is the annual equivalent of NPV—profit minus the cost of capital employed. A project with positive NPV generates positive EVA each year on average.

How do I explain NPV to non-financial stakeholders?

NPV answers: "If we do this project, how much wealthier are we today, in today's dollars?" A positive NPV means the project creates more value than it costs, considering the time value of money.

What's the difference between NPV and payback period?

Payback shows when you recover your investment but ignores time value and any cash flows after payback. NPV considers all cash flows and their timing. Use NPV for decisions; payback for risk intuition.

NPV & IRR Calculator