NPV Calculator

What is an NPV Calculator?

NPV Calculator is a financial tool which helps determine the present value of a series of cash flows by discounting them at a specific rate. Through this, one can calculate the profitability of the investment by considering the time value of money. Using the Pocketful NPV calculator provides you with a comparison between the present value of future cash flows and the current initial investments.

To use Pocketful’s NPV calculator, one needs to provide the below-mentioned inputs:

1. Initial Investment
2. Discount Rate
3. Duration (In Years)
4. Nature of Cash Inflow
5. Amount of Cash Inflows

Once the inputs are provided, the calculator will give you results in the form of

1. Total Investment
2. Present Value of Cash Inflows
3. Net Present Value

How Can an NPV Calculator Help You?

The NPV calculator helps an individual in assessing the profitability of an investment on the following criteria:

1. Profitability: A positive NPV represents a profitable investment opportunity, whereas a negative NPV denotes a bad investment opportunity.
2. Risk Management: With the help of a discount rate, one can adjust the level of risk associated with an investment opportunity. An investment with a higher risk must be discounted back at a higher discount rate and vice-versa.
3. Financial Goals: One can plan one’s financial goals efficiently by assessing the NPV of one’s investments.
4. Comparative Analysis: NPV also helps an investor compare the various investment options and choose the best one.

How Does an NPV Calculator Work?

An NPV calculator works in the following way:

1. Input: The first step would be entering the inputs required to calculate the NPV. The values include initial investment, expected future cash inflows, discount rate and duration.
2. Formula: Once all the values are inserted, the NPV formula will be applied, through which the present value of a series of cash flows will be discounted at a specific rate.
3. Results: As soon as you enter the values, you will get the result in the form of the present value of cash inflows and net present value.

Formula to Calculate NPV Calculation

The formula to calculate the NPV or Net Present Value is:

NPV = (CFn/(1+i)^tn – C

NPV	Net Present Value
CFn	Net Period Cash Flow for year n
i	Discount Rate or rate of return
tn	Time in years
C	Initial Investment

Let’s understand it with an example.

We will explain to you the calculation of the NPV calculator with an example:

For example, Mr A initially invested ₹1,00,000, and he wishes to invest (Yearly fixed cash inflow) ₹10,000 for six years. The discount rate is 12% per annum.

To calculate the NPV, we will have to implement the formula:

NPV = (CFn/(1+i)^tn – C

In this case, the following are the values:

• Initial Investment (C): 1,00,000
• Yearly Cash Inflow (CF): 10,000
• Discount Rate (i): 12%
• Time (t): 6 Years

Now, using the formula, we have to calculate the cash inflow of each year and then subtract the initial investment from it.

Year 1 = ₹10,000/(1+0.12)^1 = ₹8,929
Year 2 = ₹10,000/(1+0.12)^2 = ₹7,972
Year 3 = ₹10,000/(1+0.12)^3 = ₹7,118
Year 4 = ₹10,000/(1+0.12)^4 = ₹6,355
Year 5 = ₹10,000/(1+0.12)*5 = ₹5,674
Year 6 = ₹10,000/(1+0.12)^6 = ₹5,066

Hence, the total value of cash inflow in six-year will come to around ₹41,114.07 or ₹41,114. Now, to calculate the NPV, one needs to subtract an initial investment of ₹1,00,000

Net Present Value = ₹41,114 – ₹1,00,000 = – ₹58,886

In this case, the Net Present Value is a negative figure; therefore, Mr A’s investment is not a profitable option at a discount rate of 12%. Consequently, we can say that he can earn a better return while investing it in any other investment option.

How to Use a Pocketful NPV Calculator?

One can use the Pocketful NPV calculator using the below-mentioned steps:

1. You need to visit the Pocketful website.
2. Scroll down to the bottom of the page, where you will find the tab name Tools.
3. Once you click on it, there is a tab named Financial Calculators; click on it.
4. Click on the NPV Calculator.
5. You will be asked to enter the details such as initial investment amount, discount rate, duration, nature of cash inflows, and amount of cash inflows.
6. As soon as you enter the inputs, you will get the result in the form of the present value of cash inflows and net present value.

Benefits of Using the NPV Calculator

The significant benefits of using an NPV calculator are as follows:

1. Profitability of Investment: One can assess the profitability of the investment by considering the time value of money.
2. Comparison: Through the NPV calculator, one can easily compare different investment options and opt for the most profitable one.
3. Convenient: An NPV calculator allows you to calculate the present value of investment quickly and accurately, which may not be possible when doing manual calculations.
4. Financial Goals: The NPV calculator helps you plan your financial goals better by estimating the present value of investments.