Net Present Value (NPV) Calculator

Net Present Value calculator (NPV calculator)

The concept of present value is based on the concept of time value. Since money has time value, a rupee today is more valuable than a rupee after one year. In any investment or in any project, the net present value or NPV is one of the most important factors. You always need projects that give positive NPV as otherwise the project or investment is not viable in the first place.

In this segment we look at the net present value calculator or the NPV calculator online. The net present value calculator or the NPV calculator is a kind of software that enables you to estimate the net present value of the project or investment based on a hurdle rate or IRR as it is popularly known as. Here we look at the NPV calculator formula as well as the NPV calculator with steps in detail.

What is net present value?

Before we understand NPV calculator or net present value calculator, let us first understand what is this concept of NPV? To put in simple terms, the NPV or the Net Present Value is a simple tool that estimates the difference between the present value of future cash flows and the amount of the current investment. Let me explain. If you invest Rs.10 lakh, then the present value of the future returns should be more than the current investment. Only then it has positive NPV. That is evidenced by the NPV calculator.
The present value of your expected future cash flow is derived by discounting these cash flows at a specific hurdle rate of return, which is normally the cost of capital. NPV is most popular when you evaluate mega infrastructure projects, mergers and acquisitions and all types of investments. When you put the NPV as zero and calculate the implied yield of the cash flows, that figure is called the internal rate of return or IRR
From the concept of the net present value or NPV we derive the idea of the NPV calculator or the net present value calculator. The NPV calculator or the net present value calculator is a method of estimating the NPV of a project based on future cash flows, initial investment and the hurdle rate. Once you feed in this basic information, you get the NPV in a jiffy. Why is the NPV calculator so important. That is because NPV lies at the core of any project analysis and therefore an in-depth understanding of this concept helps you to make sound investment decisions. You can mathematically look at is as under.

NPV = (Present value of cash flows) – (Initial Investment)
It is a comprehensive evaluation technique as it takes into account the effect of time on the cash flows and also the cost of capital or the hurdle rate.

How to calculate NPV using NPV calculator?

The NPV calculator helps you to calculate the NPV of a project or investment in quick time. But it is important to understand how the process flow of this NPV works. Let us put down some key points.

• The net present value calculator or NPV calculator is a simulation which shows you the value of an investment at present.
• The NPV calculator takes into account the expenses, revenues and capital costs to determine the worth of an investment or a project.
• The first step is to project your cash flows, which is always on a net basis. Your cash flow is your revenue flows, less revenue expenses, less provision for capital depreciation.
• The next step is to identify the hurdle rate or the cost of capital. If you investment is funded by debt and equity, then you must take the weighted average cost of debt and equity as the discount rate for calculating the NPV.
• The other way is to use the cash flows to calculate the IRR of the project. Then compare the IRR of the project or the investment with other similar projects and see if the returns are higher and hence is the project is justified.

The NPV calculator helps you to decide if an investment or a project is worth it or not. The net present value is a pure financial metrics and you need to apply other non-financial parameters also before taking a final decision on the project. That is the gist of the NPV calculator.

Once the NPV is calculated, you have 3 possible outcomes:

• In the event of Positive NPV, the present value of cash inflows is greater than the present value of cash outflows. This is an ideal investment
• In the case of Negative NPV present value of cash inflows is less than present value of cash outflows. Such projects are hard to accept and to even justify internally
• In a situation of zero NPV, the outcome is ambiguous. Normally, most project managers insist on margin of safety, i.e., substantial positive NPV to okay a project.

What are the uses of NPV?

Here are some of the popular uses of NPV as calculated by the NPV Calculator.

• The NPV Calculator tells you quickly whether the project or investment is worth it or not at the current cash flows.
• The NPV Calculator is a quick summation of the time value adjusted returns of the investment or a project.
• The NPV Calculator very eloquently tells you as to how much is the money in the future, worth today.
• Very importantly, the NPV Calculator helps you measure the opportunity cost of an investment. You can plan the investments to earn inflation-beating returns.
• If you know the future value of your investments, you can make better and more optimal investment decisions. That is where the NPV Calculator comes in handy.

NPV Calculation Formula

The procedure entails intricate computations, and utilising an NPV calculator in India is often more prudent. However, there are situations where understanding how it functions can be beneficial. Here’s how to calculate NPV:

NPV = [Cn/(1+r) ^n], where n={0-N}

Where,

Cn = difference of cash flows

r = Discount rate

n = Time in years

You need to follow the selection criteria concerning the usage of the net present value. The calculation of NPV will result in three possible outcomes:

Let’s explore the functioning of the NPV calculator through an example. You’ve put Rs 1.1 crore into a project with a five-year projected duration. The expected cash flow from the project amounts to Rs 1 crore annually. The discount rate is set at 5%.

In the case of fixed yearly cash inflows, the NPV is positive, indicating that the project or investment is worthwhile.

Now, if varying amounts characterize the nature of cash inflows every year.

Example

Suppose Nice Ltd is considering expanding its business and is prepared to invest Rs 10,00,000. This investment is expected to yield cash inflows of Rs. 1,00,000 in the first year, Rs. 2,50,000 in the second year, Rs. 3,50,000 in the third year, Rs. 2,65,000 in the fourth year, and Rs. 4,15,000 in the fifth year. Assuming a discount rate of 9%, let’s see how to calculate NPV with example:

In this case, the cash inflow of Rs. 1,00,000 occurring at the end of the first year is subject to a discount rate of 9%, resulting in a present value of Rs. 91,743. Similarly, the cash inflow of Rs. 2,50,000 at the end of the second year is discounted, resulting in a present value of Rs. 2,10,429, and so on for subsequent years.

The cumulative sum of the present values of cash inflows over all five years amounts to Rs. 10,29,879. Considering the initial investment of Rs. 10,00,000, the NPV calculates to Rs. 29,879.

As the NPV demonstrates a positive value, this investment proves to be profitable. Consequently, Nice Ltd is justified in proceeding with the expansion plan.

Advantages of using IIFL’s NPV Calculator

• IIFL’s NPV calculator online provides investors with the means to assess the potential profitability of an investment before committing capital to it.
• By utilising this NPV calculator, you can gauge the present worth of your prospective investment.
• By discerning the future value of your investment, the NPV calculator empowers you to make more informed financial choices.
• It also computes the opportunity cost associated with an investment, aiding you in generating returns that surpass inflation rates with the most advantageous investment options.
• IIFL’s NPV calculator is a user-friendly tool that delivers results based on user-provided data, simplifying the process for investors by enabling them to project the future cash flow of their investments with ease.