What Are the Formula and Benefits of the Net Present Value (NPV) Calculator?
The Net Present Value calculator (NPV) calculates the differences between current investments and the value of future cash flows. The main application of the NPV calculator is the assessment of investments and projects. First of all, one needs to understand the formula of the net present value calculator. This particular calculator will generally estimate the present value of the investment made.
Through this calculator, one will know the calculation of the investment value, any other expenses, costs, or revenue amount based upon a particular project. The primary use of calculating these specific terms is determining whether one can invest in a particular project. For this purpose, one needs to mention the following values in the Net Present Value Calculator (NPV).
The Net Present Value Calculator will have a formula box in which you should enter the values. The formula box contains the discount rates, the total number of years, and the amount to be invested. After entering all of the above matters, the calculator will show you the inflows of the present value and will also determine the current values based on the inflow type you chose.
Even if the Net Present Value Calculator is online, generally, people should know the formula used for calculating the values. So, for this purpose, you should do the following calculation.
Net Present Value Formula or NPV Formula:
The formula for the calculation of NPV is:
NPV is equal to [(net period cash flow/1+discount rate (the rate of return)*the number of a period (the total number of years)] – an investment made initially.
So, this is the formula used to calculate the Present Net Value. However, this is a long process, and it takes a lot of time for a normal human being to calculate. Therefore, it will be better to provide these values for the Net Present Value Calculator Online and figure it out accordingly.
In general, one can calculate it by this formula, NPV = Present value of the expected cash flow – Present value of the invested cash.
After calculating, using these formulae, you can have three possible outcomes:
- In the event of a negative net present value, it implies that the investment into that particular project will go into losses. People find it hard to accept such projects and justify them internally.
- In the event of a positive value, it implies that you are more likely to earn profits from such an investment. Therefore, such projects are ideal for investments.
- In a situation of zero net present value, it implies that the investment outcomes are ambiguous.
Therefore, the Net Present Value calculator will help you determine whether you should invest in a particular project.
Benefits of the NPV Calculator:
There are a lot of benefits with this Present Net Calculator. These are as follows:
The first and foremost benefit of the calculator is that it will provide nearly the exact values, unlike the errors which happen when calculated by hand. Moreover, the process is relatively inexpensive; it is much easier when providing all the values to the NPV calculator online.
The values derived from this NPV calculator are still approximate numbers. They are just an estimation based upon the values entered by you. So, an investor should use the NPV calculator only for an estimate; hence, one should only partially depend upon its value and invest accordingly.
However, even by following the estimation values, you will get an idea about the project you are willing to invest in. Also, you can plan for better investments in it or any other projects and finally achieve your financial goals. The NPV calculator will also help you earn the returns out of inflation by just calculating, which will further help you invest in those investments and determine the investment’s opportunity cost.
As to the Net Present Value Calculator Online, there are various apps to determine the values and calculate them for you. You can download them once, and after entering the values, you can get the estimated answer.
Based on the answer, you can decide whether to invest in a project or not to invest into it. It helps calculate the estimated amount for a particular project in which you will probably invest. It also allows you to invest in various projects only after calculating the values.
For your understanding, here given is the following example:
Just imagine that you are an investor willing to invest in a project your company proposed. This investment will provide ownership rights on a new housing area etc. So, this particular housing area will cost you 50,00,000 rupees under a four-year lease.
So, you will expect your company to make profits because of this new venture, and you wish to invest in this project. However, you need to know the estimated values of whether investing in this might lead to profitable results. Therefore, you can calculate the cash flow using the Net Present Value Calculator. So, you need to enter the details which you wish are approximate to yours for those four years. Then accordingly, you need to calculate those values.
Finally, you will get the cash flows based on the estimated or approximate values you entered into the NPV calculator. This calculator will assist you in estimating the answers. Positive NPV will always lead you toward profitable situations. And investing in that project will land you profits. It shows that you can invest in that project and earn better future returns. Sometimes, it may also show zero, meaning the cash inflow will equal the cash outflow. So there won’t be any profits in such cases. So, determine them accordingly and assess your thoughts on investing in the projects.
Pranab Bhandari is an Editor of the Financial Blog “Financebuzz”. Apart from writing informative financial articles for his blog, he is a regular contributor to many national and international publications namely Tweak Your Biz, Growth Rocks ETC.
