NPV - Net Present Value Calculator
Use this present value calculator to compute the value today of a lump sum payment in the future - discounted for inflation and the time value of money.
The net present value calculates your preference for money today over money in the future because inflation decreases your purchasing power over time.
If you want to calculate the present value of a stream of payments instead of a one time, lump sum payment then try our present value of annuity calculator here.
Present Value Calculator
Net Present Value (NPV) is the value of your future money in today’s dollar. The concept is that a dollar today is not worth the same amount as a dollar tomorrow. Net Present Value is considered a standard way of making investment decisions. The formula involves several components that allow an entity to make informed decisions when reviewing several different projects or investments. While present value calculations are most often used in businesses, having a good understanding of present value calculation is critical to a family being able to meet their future financial goals.
Net Present Value Illustration
Suppose one person owes you money for $10,000 and that person promised to pay you after 5 years, if we calculate the present value of your $10,000 with a conservative inflation rate of 7%, using the net present value calculator above, the result will be $7,129.86. The result is not very impressive and it is considered a loss.
To cover up for the loss you may need to charge interest in your money so that you will still have your $10,000 at the end of 5 years. This emphasizes just how important it is to consider what your interest rate is and the declining effect time has on money when discounted back to present dollars.
Present Value Formula and Definition Of Terms
It is important to understand that the three most important components of present value are time, expected rate of return, and the size of the future cash amount.
The formula for present value is:
When Is Net Present Value Used?
The Present Value formula has a broad range of uses. Aside from the various areas of finance that present value analysis is used; the formula is also used as a component of other financial formulas.
Present value is also useful when you are planning for an early retirement or you would want to calculate your future income and expenses. Present value can be used to give you a rough idea of the amount you need to have saved at the start of retirement to meet your spending needs. Compare that to what you now have saved, or what you think you’ll have saved by your retirement date and you’ll have a rough idea of whether you’re on track or not. To give you a full picture if you can live with the lump sum money that you will be having during retirement, use the present value calculator to determine the net present value of the amount.
Pros and Cons of Present Value Method
Net Present Value is easy to use, easily customizable. The rates can be adjusted to reflect risks and other factors affecting your investments. Another advantage of the net present value method is its ability to compare investments. As long as the NPV of all options are accounted at the same point in time, the investor can compare the scale of each investment. The project with the highest net present value will provide the most additional value for the firm. The company may then take those options that bring the most value to the entity. However, if the results are all negative, the company should decide not to invest on any of the options.
There are few disadvantages of the net present value method but still most companies use it for evaluating investments. Oftentimes, they just use other efficiency metrics to complement their NPV calculations before making decisions.
One disadvantage of the net present value method is the estimate is not 100% accurate since it only uses assumptions. As we all know, not all assumptions are feasible. It is only accurate if you know the exact discount or inflation rates for the duration of the project, the exact future amount and the year of occurrence. Another problem with using the net present value method is that it does not fully account for opportunity cost, and you cannot view the full picture of an investment’s gain or loss.
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