Net Present Value (NPV)

Capital Budgeting

Updated Apr 2026 • Has calculator

The sum of all discounted future cash flows from a project minus the initial investment.

What is NPV?

Net present value (NPV) is the primary capital budgeting tool in corporate finance. It discounts every projected cash flow from a project back to today's dollars at the company's cost of capital (hurdle rate), then subtracts the initial outlay. A positive NPV means the project creates value above the hurdle rate and should be accepted; a negative NPV destroys value and should be rejected. NPV is preferred over IRR and payback period because it directly measures value creation in dollar terms and handles unconventional cash flow patterns correctly.

Formula

NPV = Σ [CFᵢ ÷ (1 + r)^i] for i = 0 to n

Worked Example

5-year project at 10% hurdle rate

Step 1 Initial investment (CF₀): −$500,000

Step 2 Cash flows: $120K, $150K, $180K, $160K, $130K (years 1–5)

Step 3 Discount rate: 10%

Step 4 NPV = −$500K + $120K/1.1 + $150K/1.1² + $180K/1.1³ + $160K/1.1⁴ + $130K/1.1⁵

Step 5 NPV = −$500K + $109.1K + $124.0K + $135.2K + $109.3K + $80.7K = $58,300

Step 6 → Positive NPV: the project creates ~$58,300 in value above the 10% hurdle rate

Source: CFA Institute — Corporate Finance, 4th ed., Capital Budgeting (2024-01-01)

Calculate NPV

Cash Flows (CF₀, CF₁, CF₂, …)

Enter comma-separated cash flows starting at t=0. CF₀ is typically negative (initial investment). E.g.: -1000, 300, 400, 500, 200

Discount Rate (Hurdle Rate)

Company's cost of capital or required return

Net Present Value

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Not investment advice.

How to Interpret NPV

< 0

Negative NPV — destroys value; reject the project

0 – 0

NPV = 0 — exactly meets hurdle rate; marginal

> 0.01

Positive NPV — creates value above hurdle rate; accept

📚 Capital Budgeting — Complete the path

Sources