NPV & IRR Calculator: Investment Project Analysis

Capital Budgeting in 2026
Why Time Value Analysis Matters
How to Use This Calculator
The Mathematics of NPV and IRR
Industry Benchmarks and Discount Rates
Worked Calculations with Real Projects
Private Equity and Venture Capital Returns
Limitations and When to Seek Professional Advice
Sources
FAQs

Capital Budgeting in 2026

Corporate capital allocation decisions in 2026 occur against a backdrop of elevated interest rates, shifting risk premiums and persistent inflation. The discount rate has become the binding constraint on project valuations—a project that would have been approved at 2021 rates may now fail to clear the higher hurdle.

The Hurdle Rate Environment

Survey analysis spanning two decades reveals that corporate hurdle rates consistently build in a 6 percentage point buffer above the weighted average cost of capital (WACC). Duke CFO surveys from 2007 to 2022 documented a significant gap between typical hurdle rates (15%) and WACC (9%) across surveyed firms.

This conservative approach serves a purpose: when projects underperform expectations, the buffer ensures that even disappointing outcomes often remain value-neutral rather than value-destroying. However, it also means that genuinely attractive projects may be rejected.

WACC by Industry Sector

WACC varies significantly across industries based on capital structure, operational risk and market conditions. Professor Aswath Damodaran at NYU Stern maintains comprehensive industry WACC data, updated as of January 2026.

Representative WACC Ranges (2025-2026):

| Sector | Typical WACC Range | Key Drivers | |--------|-------------------|-------------| | Technology (mature) | 9-12% | High equity component, growth risk | | Healthcare (pharma) | 7-10% | Stable cash flows, patent protection | | Healthcare (biotech) | 12-18% | Development risk, uncertain revenues | | Energy (traditional) | 8-12% | Environmental/regulatory risk | | Energy (renewable) | 6-9% | PPA-backed cash flows, policy support | | Manufacturing | 8-11% | Capital intensity, cyclicality | | Utilities | 5-7% | Regulated returns, stable demand |

KPMG's Cost of Capital Study 2025 found participating companies applied WACC rates ranging from 5.2% to 10.4%, with significant variation based on geography and business model.

Why Time Value Analysis Matters

The fundamental principle underlying NPV and IRR is that money has time value: a pound received today is worth more than a pound received in the future. This reflects three realities:

Opportunity cost: Money received today can be invested to generate returns
Inflation: Future money purchases less than current money
Uncertainty: Future cash flows carry risk that may not materialise

NPV: Absolute Value Creation

Net Present Value calculates the sum of all discounted future cash flows minus the initial investment. A positive NPV indicates the project creates value exceeding the required return—it should proceed. A negative NPV destroys value relative to alternatives—it should be rejected.

Decision Rule: Accept projects where NPV > 0

IRR: Percentage Return

Internal Rate of Return is the discount rate at which NPV equals exactly zero. It represents the project's effective annual yield. If IRR exceeds the hurdle rate, the project generates returns above the required minimum.

Decision Rule: Accept projects where IRR > Hurdle Rate

When NPV and IRR Conflict

For mutually exclusive projects (where only one can proceed), NPV and IRR may recommend different choices. This typically occurs when projects differ in scale or timing.

Example:

Project A: £50,000 investment, IRR 30%, NPV £15,000
Project B: £200,000 investment, IRR 20%, NPV £40,000

IRR favours Project A (30% > 20%), but Project B creates more absolute value (£40,000 > £15,000). When capital is available, maximising NPV is generally the correct approach.

How to Use This Calculator

Step 1: Enter Initial Investment Input the upfront cost as a positive number. Include all setup costs: equipment, installation, training, working capital requirements and integration expenses. Underestimating initial investment is a common source of NPV projection error.

Step 2: Enter Discount Rate Input your required return as a percentage. For corporate projects, this is typically WACC plus a risk premium. For personal investments, use your expected return on alternative opportunities.

Step 3: Add Cash Flows Enter projected cash flows for each future period:

Use positive numbers for inflows (revenue, savings, residual value)
Use negative numbers for outflows (ongoing costs, maintenance, reinvestment)
Add or remove periods as needed for your project timeline

Step 4: Review Results The calculator displays:

Net Present Value (NPV): Total value created in today's terms
Internal Rate of Return (IRR): Effective percentage return
Profitability Index (PI): Value per pound invested
Payback Period: Time to recover initial investment
Year-by-year breakdown: Discounted cash flow for each period

The Mathematics of NPV and IRR

NPV Formula

NPV = -Initial Investment + Σ [CFₜ / (1 + r)ᵗ]

Where:

CFₜ = Cash flow in period t
r = Discount rate
t = Time period

Detailed Example:

Initial investment: £150,000 Discount rate: 12% Annual cash flows: £45,000 for 5 years Terminal value (Year 5): £20,000

| Year | Cash Flow | Discount Factor | Present Value | |------|-----------|-----------------|---------------| | 0 | -£150,000 | 1.0000 | -£150,000 | | 1 | £45,000 | 0.8929 | £40,179 | | 2 | £45,000 | 0.7972 | £35,874 | | 3 | £45,000 | 0.7118 | £32,030 | | 4 | £45,000 | 0.6355 | £28,598 | | 5 | £65,000 | 0.5674 | £36,882 | | NPV | | | £23,563 |

The positive NPV of £23,563 indicates the project creates value at a 12% discount rate.

IRR Calculation

IRR is the rate (r) that makes NPV equal zero:

0 = -Initial Investment + Σ [CFₜ / (1 + IRR)ᵗ]

IRR cannot be solved algebraically for most cash flow patterns and requires iterative calculation (Newton-Raphson method). Using the example above:

At 12%: NPV = £23,563 (positive, try higher rate)
At 18%: NPV = £3,412 (positive, try higher)
At 20%: NPV = -£2,891 (negative, try lower)
At 19.1%: NPV ≈ £0

IRR ≈ 19.1%

Since IRR (19.1%) exceeds the hurdle rate (12%), the project is acceptable.

Profitability Index

PI measures value creation per unit of investment:

PI = (NPV + Initial Investment) / Initial Investment
PI = (£23,563 + £150,000) / £150,000 = 1.16

Each pound invested returns £1.16 in present value terms. PI is particularly useful when capital is constrained and projects must be ranked.

Industry Benchmarks and Discount Rates

Corporate WACC Data Sources

The most authoritative sources for industry-specific discount rates include:

NYU Stern (Damodaran): Comprehensive US and global WACC by industry, updated annually
Kroll Cost of Capital Navigator: Professional valuation resource with sector-specific data
KPMG Cost of Capital Study: Regional analysis of applied discount rates

Typical Project Hurdle Rates

Research consistently shows hurdle rates exceed WACC by significant margins:

| Project Type | Typical Hurdle Rate | Rationale | |--------------|--------------------:|-----------| | Core business expansion | 12-15% | Lower risk, proven operations | | New product development | 15-20% | Higher uncertainty, market risk | | Geographic expansion | 15-22% | Operational and currency risk | | R&D / Innovation | 20-30% | High failure rate, long payback | | Acquisitions | 12-18% | Integration risk, synergy assumptions |

Renewable Energy Project Returns

Solar and wind projects present distinct NPV characteristics. According to the International Renewable Energy Agency (IRENA), solar PV technology costs have declined 89% since 2009, dramatically improving project economics.

Utility-scale Solar (2025-2026):

Typical IRR range: 5-12%
Average ROI: 13.52% annually
Simple payback: 4-9 years (varies with electricity prices)
NPV sensitivity: Highly dependent on power purchase agreement (PPA) rates

Research published in Springer's Discover Sustainability examined how changing energy prices, interest rates and investment costs affect renewable project NPV. Simple payback periods for solar projects fluctuated from 4.0 years (2022) to 9.1 years (2024), illustrating sensitivity to economic conditions.

Worked Calculations with Real Projects

Scenario 1: Manufacturing Equipment Upgrade

Profile: UK manufacturer evaluating £500,000 automated production line expected to reduce labour costs and improve quality over 7 years.

Investment:

Equipment cost: £420,000
Installation and integration: £50,000
Training: £30,000
Total initial investment: £500,000

Annual Cash Flows:

Labour cost savings: £95,000
Quality improvement savings: £25,000
Maintenance costs: -£15,000
Net annual cash flow: £105,000

Terminal Value: £40,000 (equipment residual value, Year 7)

NPV Calculation at 10% Discount Rate:

| Year | Cash Flow | PV Factor | Present Value | |------|-----------|-----------|---------------| | 0 | -£500,000 | 1.0000 | -£500,000 | | 1 | £105,000 | 0.9091 | £95,455 | | 2 | £105,000 | 0.8264 | £86,777 | | 3 | £105,000 | 0.7513 | £78,888 | | 4 | £105,000 | 0.6830 | £71,716 | | 5 | £105,000 | 0.6209 | £65,197 | | 6 | £105,000 | 0.5645 | £59,270 | | 7 | £145,000 | 0.5132 | £74,411 | | NPV | | | £31,714 |

IRR Calculation: Testing rates until NPV = 0:

At 10%: NPV = £31,714
At 14%: NPV = -£9,782
At 12.8%: NPV ≈ £0

IRR ≈ 12.8%

Decision: Positive NPV (£31,714) and IRR exceeding the 10% hurdle rate support project approval.

Scenario 2: Commercial Solar Installation

Profile: Commercial property owner in California evaluating 500kW rooftop solar installation.

Investment:

System cost: $600,000
Installation: $80,000
Permits and grid connection: $20,000
Total: $700,000
Less: 30% Investment Tax Credit: -$210,000
Net initial investment: $490,000

Annual Cash Flows (Years 1-25):

Electricity savings: $85,000 (Year 1, escalating 2% annually)
Maintenance: -$8,000/year
Net Year 1: $77,000 (escalating thereafter)

NPV Calculation at 8% Discount Rate: Using geometric series for escalating cash flows over 25 years:

Present value of savings (2% growth, 8% discount) ≈ $1,150,000 Present value of maintenance ≈ -$85,000 NPV ≈ $1,150,000 - $85,000 - $490,000 = $575,000

IRR ≈ 15.2%

This aligns with industry data showing solar farm investments averaging 13.52% annual ROI, outperforming stocks (7-10%), bonds (3-5%) and real estate (6-10%).

Scenario 3: Acquisition Valuation

Profile: Private equity firm evaluating acquisition of manufacturing business with projected cash flows.

Purchase Price: £8,000,000 Hurdle Rate: 20% (typical buyout target)

Projected Cash Flows:

| Year | EBITDA | CapEx | Working Capital | Free Cash Flow | |------|--------|-------|-----------------|----------------| | 1 | £1,800,000 | -£200,000 | -£100,000 | £1,500,000 | | 2 | £2,000,000 | -£180,000 | -£50,000 | £1,770,000 | | 3 | £2,200,000 | -£200,000 | -£50,000 | £1,950,000 | | 4 | £2,400,000 | -£200,000 | -£30,000 | £2,170,000 | | 5 | £2,600,000 | -£220,000 | £0 | £2,380,000 |

Exit Assumption (Year 5): 6x EBITDA = £15,600,000

NPV Calculation at 20%:

| Year | Cash Flow | PV Factor | Present Value | |------|-----------|-----------|---------------| | 0 | -£8,000,000 | 1.0000 | -£8,000,000 | | 1 | £1,500,000 | 0.8333 | £1,250,000 | | 2 | £1,770,000 | 0.6944 | £1,229,111 | | 3 | £1,950,000 | 0.5787 | £1,128,472 | | 4 | £2,170,000 | 0.4823 | £1,046,528 | | 5 | £17,980,000 | 0.4019 | £7,226,125 | | NPV | | | £3,880,236 |

IRR ≈ 32.4%

The strong NPV and IRR exceeding the 20% hurdle suggest an attractive acquisition. However, the result is highly sensitive to the exit multiple assumption—sensitivity analysis is essential.

Private Equity and Venture Capital Returns

Private market investments provide benchmarks for aggressive return expectations.

Historical IRR Performance

Hamilton Lane's 2025 Market Overview documented that $1 invested in private equity in 2015 would have grown to $3.96 by 2024, outpacing the S&P 500 ($3.51) and MSCI World ($2.61).

PE Performance by Quartile:

| Performance Tier | IRR (2000-2020) | TVPI Multiple | |------------------|-----------------|---------------| | Top Quartile | 22.5% | 2.15x | | Median | ~12% | ~1.5x | | Bottom Quartile | Less than 8% | Less than 1.2x |

A Fisher College of Business study found top-quartile funds exceeded public market benchmarks by 35%, whilst median funds roughly matched public equity returns.

Buyout vs. Venture Capital

| Strategy | Target IRR | Typical Hold Period | |----------|------------|---------------------| | Buyout (large cap) | 15-20% | 4-6 years | | Buyout (mid-market) | 20-25% | 4-5 years | | Growth Equity | 20-30% | 3-5 years | | Venture (early stage) | 30%+ | 5-8 years | | Venture (late stage) | 20-25% | 3-5 years |

Between 2015 and 2025, top-performing buyout managers achieved 20.7% IRR, significantly outperforming median managers at approximately 12%. The spread between top and bottom performers reached 14 percentage points for 2021 vintage funds—the highest since 2014—underscoring the importance of manager selection.

CalPERS Institutional Performance

As of March 2025, CalPERS' private equity programme reported since-inception net IRR of 11.1% with a 1.5x multiple across all active partnerships. This represents institutional-quality returns net of fees and carried interest.

Limitations and When to Seek Professional Advice

NPV and IRR Limitations

Cash flow estimation uncertainty: Both metrics are only as reliable as the underlying projections. Sensitivity analysis showing how NPV changes with variations in key assumptions often proves more valuable than point estimates.

Discount rate selection: A 2 percentage point error in discount rate significantly affects NPV. For a 10-year project with £100,000 annual cash flows, the difference between 8% and 10% discount rates exceeds £60,000 in NPV.

IRR technical issues:

Multiple IRRs may exist when cash flows change sign more than once
IRR assumes reinvestment at the IRR rate (often unrealistic)
IRR cannot rank mutually exclusive projects correctly when scale differs

Terminal value sensitivity: For long-term projects, terminal value assumptions often dominate NPV. Small changes in exit multiples or growth rates produce large swings in calculated value.

Modified Internal Rate of Return (MIRR)

MIRR addresses the reinvestment assumption by explicitly specifying finance and reinvestment rates:

MIRR = [(Terminal Value of Inflows / PV of Outflows)^(1/n)] - 1

MIRR typically produces more conservative estimates than IRR and is preferred when cash flows will realistically be reinvested at the cost of capital rather than the project's IRR.

When to Engage Professionals

Complex capital budgeting decisions benefit from professional analysis:

Acquisitions with complex deal structures
Cross-border investments with currency and tax considerations
Projects requiring regulatory approval or compliance analysis
Situations where multiple stakeholders require independent verification
Decisions with significant strategic implications beyond financial returns

Sources

FAQs

What is a good IRR for a business project?

An acceptable IRR exceeds your hurdle rate, which typically includes WACC plus a risk premium. Survey data shows average corporate hurdle rates around 15% despite WACC averaging 9%. For moderate-risk projects, IRR of 12-18% is generally considered acceptable; higher-risk ventures may require 20%+ to compensate for uncertainty.

Why do companies set hurdle rates above WACC?

Research documents a consistent 6 percentage point buffer between hurdle rates and WACC. This conservatism protects against projection optimism and ensures that even underperforming projects remain close to value-neutral. However, it also means some genuinely attractive projects are rejected.

How do I choose the right discount rate?

For corporate projects, start with your WACC and add a risk premium based on project-specific uncertainty. Industry WACC data from sources like NYU Stern provides benchmarks. For personal investments, use your expected return on alternative opportunities as the discount rate.

What if NPV and IRR give different recommendations?

When evaluating mutually exclusive projects, trust NPV. IRR can mislead when projects differ in scale or timing. A smaller project may have higher IRR but create less total value. When capital is available, maximising NPV is the correct approach.

Can IRR have multiple values?

Projects with non-conventional cash flows (signs change more than once) may have multiple IRRs or no valid IRR. This occurs when projects require significant later-stage investment or face terminal costs. In such cases, rely exclusively on NPV for decision-making.

What is the difference between NPV and PI?

NPV measures absolute value creation in currency terms. Profitability Index (PI) measures value per unit invested (PI = [NPV + Investment] / Investment). Use NPV when maximising total value; use PI when capital is rationed and you must choose among positive-NPV projects.

How sensitive is NPV to the discount rate?

Highly sensitive. For long-duration projects, small discount rate changes produce large NPV swings. A 10-year project with £50,000 annual cash flows has NPV of £307,000 at 8% versus £248,000 at 12%—a 24% difference from a 4 percentage point rate change.

What IRR do private equity firms target?

Buyout funds typically target 15-25% net IRR, with top-quartile performers achieving 20%+ consistently. Venture capital targets 25-35%+ for early-stage investments. Actual performance shows significant dispersion: median PE funds return approximately 12% whilst top performers exceed 22%.

How do I account for inflation in NPV calculations?

Use consistent treatment: either nominal cash flows (including inflation) with nominal discount rate, or real cash flows (constant purchasing power) with real discount rate. Mixing real and nominal produces incorrect results.

What is terminal value and why does it matter?

Terminal value captures value beyond the explicit forecast period, either through perpetuity growth assumptions or exit multiples. For long-term projects, terminal value often represents 50-80% of total NPV, making these assumptions critical to the analysis.

NPV & IRR Calculator