What's the difference between NPV and IRR?
NPV is the dollar value a project adds after discounting all cash flows at your cost of capital. IRR is the discount rate that would make NPV exactly zero — a percentage return. NPV is generally preferred because it reflects absolute value creation, handles reinvestment assumptions cleanly, and works for non-conventional cash flows where IRR can have multiple solutions or none. When NPV and IRR disagree on ranking mutually exclusive projects, follow NPV.
How do I pick a discount rate?
For projects with risk similar to the firm's overall business, use the Weighted Average Cost of Capital (WACC). Public companies estimate WACC from their actual debt-and-equity mix and the cost of each component (often using CAPM for equity). For riskier ventures — new geographies, unproven technology — add a risk premium of 2 to 5 percentage points. For lower-risk cost-saving investments in core operations, WACC is usually fine unchanged.
What's the time value of money, and why does it matter for NPV?
The time value of money is the principle that a dollar today is worth more than a dollar in the future, because today's dollar can be invested to earn a return. NPV operationalizes this by discounting each future cash flow — dividing by (1+r) raised to the year — so flows received sooner contribute more to the result. Without discounting, you'd treat $1 in year 1 the same as $1 in year 10, which would systematically overvalue long-dated projects.
How does inflation factor into the NPV calculation?
Stay internally consistent. Either project nominal cash flows (which include expected price increases) and discount at a nominal rate, or project real cash flows (in today's purchasing power) and discount at a real rate. The Fisher equation links them: (1 + nominal) = (1 + real) × (1 + inflation). Mixing nominal cash flows with a real rate systematically inflates NPV; mixing real cash flows with a nominal rate systematically deflates it.
Can NPV be negative, and what does that mean?
Yes. A negative NPV means the project's discounted cash flows do not cover the initial investment at your required return — every dollar invested earns less than your cost of capital. The standard decision rule is to reject negative-NPV projects because they destroy shareholder value. Exceptions exist for strategic options (entering a market, blocking a competitor), but those benefits should be quantified rather than waved through.
How do I handle terminal value or salvage value?
Terminal value represents the worth of the asset or business at the end of the forecast horizon. For physical assets, it's the resale or scrap value net of disposal costs and tax. For going-concern businesses, it's often estimated as a perpetuity: TV = (final-year cash flow × (1 + g)) / (r − g), where g is the long-run growth rate. Add terminal value to the final-year cash flow in your input and discount the combined figure back to year 0 with the standard NPV formula.
How do I handle uncertain cash flows?
Three common approaches. First, use expected (probability-weighted) cash flows and discount at a risk-adjusted rate. Second, run scenarios — base, upside, downside — and look at the range of NPV outcomes rather than a single point estimate. Third, use Monte Carlo simulation to draw thousands of cash-flow paths from distributions on the key inputs and produce a probability distribution of NPV. For most non-listed decisions, scenario analysis is the practical sweet spot.
Should I include sunk costs in NPV?
No. Sunk costs are already spent regardless of whether you proceed, so they are irrelevant to the go / no-go decision. Only include incremental cash flows that occur because of the investment. Feasibility studies, prior R&D, and marketing already paid belong on the income statement of history, not in the NPV of the next project.
What if my project has cash flows that change sign more than once?
Non-conventional cash flow patterns — outflow, inflow, outflow again (think mine reclamation costs or a planned upgrade mid-life) — are well-handled by NPV but can give IRR multiple solutions or none. NPV remains a single, unambiguous number for any pattern, which is one reason it's preferred over IRR for irregular projects. Enter the negative years as negative numbers if your model supports it, or compute NPV in a spreadsheet for full flexibility.
Does the calculator handle taxes and depreciation?
Not directly — you enter cash flows you've already adjusted. For accurate NPV, the cash flows you input should be after-tax operating cash flow: (revenue − cash costs − depreciation) × (1 − tax rate) + depreciation. The depreciation tax shield (depreciation × tax rate) is real cash, so it stays in the calculation, but depreciation itself is added back because it isn't a cash outflow. Salvage value should be net of any tax on disposal gain.
Why is my answer slightly different from a spreadsheet's NPV function?
Spreadsheet NPV functions (e.g., Excel's =NPV) typically discount the first cash flow back one period and assume it occurs at the end of year 1, so to get a comparable result you subtract the initial investment separately: =NPV(rate, year1_cf : year_n_cf) − initial_investment. This calculator follows the same convention — initial investment at year 0, all entered cash flows at the end of their respective years. Differences usually come from year-0 versus year-1 timing assumptions, not the math itself.
