Each year’s cash flow discounted back to today, with a running cumulative NPV. The year cumulative NPV turns positive is roughly the discounted payback point.
Year
Cash Flow
Discount Factor
Present Value
Cumulative NPV
0
$-100,000
1.0000
$-100,000
$-100,000
1
$30,000
0.9091
$27,273
$-72,727
2
$30,000
0.8264
$24,793
$-47,934
3
$30,000
0.7513
$22,539
$-25,394
4
$30,000
0.6830
$20,490
$-4,904
5
$30,000
0.6209
$18,628
$13,724
Estimates only — not financial, tax, or professional advice.
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What it calculates: Net Present Value (NPV), PV of All Cash Flows, Simple Payback Period, Profitability Index (PV / Investment).
A positive NPV is surplus after the cost of capital has already been paid
The default project costs $100,000 today and returns $30,000 a year for five years. Undiscounted that is $150,000, an apparently obvious $50,000 gain. Discounted at 10% it is worth $113,724 today, so the real surplus is $13,724. That difference of $36,276 is not a fee or a loss — it is the value of receiving money later rather than now, priced at the rate you could otherwise earn.
NPV = sum[CF_t / (1+r)^t] - C0 | PI = PV of CFs / Initial Investment
The discount rate is doing the deciding. It represents what your money would make in the next-best use of comparable risk, so the 10% cost of capital is already inside the answer. A positive NPV therefore does not mean the project makes money; it means the project makes more than the alternative you measured it against. That is why NPV is the decision rule and payback period is only a description.
In Excel, NPV() discounts its first value by a full period, so the upfront cost stays outside it: with the $100,000 cost in B1 and the five $30,000 cash flows in B2:B6, =NPV(10%, B2:B6) - B1 returns the same $13,724. Putting B1 inside the function discounts the cost a year too far.
Raise the hurdle from 10% to 15% and the same project is worth $587
NPV falls as the discount rate rises, and it falls fastest on cash flows furthest out. At 10% this project clears by $13,724; at 15% it is worth almost nothing; above roughly 15.24% it turns negative. That crossing point is the internal rate of return — the rate at which the project exactly breaks even in present-value terms — and it is the same number the calculator would report if you solved for a zero NPV.
Choosing the rate honestly is most of the work. Using a rate that is too low makes almost any project look acceptable. A common approach is the weighted average cost of capital for a business, or the return available on comparable-risk investments for an individual, with a premium added for a project whose cash flows are less certain than that benchmark.
A PI of 1.137 says each dollar invested returns $1.14 of present value
Profitability index divides the present value of the inflows by the initial outlay: $113,724 over $100,000, or 1.137. Anything above 1.0 has a positive NPV, so the two measures always agree on accept-or-reject. They disagree on ranking.
NPV measures absolute value created; PI measures value per dollar committed. A $1m project with a $50,000 NPV beats a $100,000 project with a $30,000 NPV on NPV and loses on PI. When capital is unconstrained, follow NPV. When you can only fund a limited pool of projects, PI tells you how to get the most present value out of the budget you have.
3.33 years is undiscounted, and that is a limitation rather than a shortcut
Simple payback divides the outlay by the annual inflow: $100,000 over $30,000 is 3.33 years. It is easy to compute and easy to explain, which is why it persists, but it treats a dollar in year four as identical to a dollar today and ignores everything that happens after the payback point entirely.
That blind spot cuts both ways. A project that pays back in two years and then stops looks better than one that pays back in four and then runs for fifteen. Use payback as a rough liquidity check — how long your capital is exposed — and never as the deciding measure between projects.
Equal annual amounts, arriving exactly on schedule, with no tax and no terminal value
The calculator takes one recurring figure and repeats it for the chosen number of years. Real projects rarely behave that way: they ramp, they peak, they decline, and they often carry a salvage or terminal value at the end. For an uneven stream you would need to discount each year separately, and the answer can differ substantially from an averaged input.
Tax is outside the model, and it usually matters — cash flows should be after-tax, and depreciation or capital allowances can shift the timing considerably. Inflation must be handled consistently: either discount nominal cash flows at a nominal rate, or real cash flows at a real rate. Mixing the two is the most common error in a discounted cash-flow model and it always flatters the project.
Frequently Asked Questions
What does a positive NPV mean?
A positive NPV means the project is expected to generate more value than its cost of capital, so the general rule is to accept it. A zero NPV means it breaks even exactly at your discount rate, and a negative NPV means it is expected to fall short of your required return. The size of a positive NPV is the value, in today’s dollars, the project is expected to add.
How do I choose the discount rate?
Use the return you require for the risk involved, often your cost of capital. Businesses commonly use their weighted average cost of capital (WACC); an individual might use the return available on a comparable investment. Because the rate is applied to every year and compounds, even a small change can flip the decision, so pick it deliberately.
What is the profitability index?
The profitability index (PI) is the present value of the cash flows divided by the initial investment. A PI above 1 means each dollar invested returns more than a dollar in present-value terms, equivalent to a positive NPV. It is most useful when ranking several projects competing for a limited budget, because it expresses value per dollar invested.
How is NPV different from payback period?
Payback period measures how long until you recover the initial cost, which is easy to grasp but ignores the time value of money and any cash flows after payback. NPV discounts every cash flow and accounts for the project’s full life. Use payback as a quick screen and NPV as the actual accept-or-reject test.
What is the relationship between NPV and IRR?
The internal rate of return (IRR) is the discount rate at which NPV equals zero. If your discount rate is below the IRR, NPV is positive. IRR is intuitive as a percentage, but it can be unreliable with unconventional cash-flow patterns or when comparing projects of different scale, so NPV is usually the more dependable signal.
Should I use nominal or real cash flows?
Either works, as long as you stay consistent. If your cash flows include expected inflation (nominal), use a nominal discount rate. If they are in today’s purchasing power (real), use a real rate. Mixing the two, such as real cash flows with a nominal rate, is a common error that distorts the result.
What if my cash flows are uneven each year?
This calculator assumes an equal cash flow every year for simplicity. Real projects often have uneven or front-loaded cash flows, which can meaningfully change the NPV. For those, discount each year’s specific amount separately in a spreadsheet. The principle is the same; only the per-year inputs differ.
Sources & References
Figures on this page are checked against primary, authoritative sources. Links open in a new tab.
Returns are assumptions, not guarantees. Actual results may vary because of market performance, taxes, fees, inflation, and timing. This is an educational projection, not investment advice.
Published the calculator with its formula, worked example, assumptions, limitations and FAQs, and added an automated formula test suite covering it.
Checked the year-by-year discounting loop against the closed-form annuity factor, and confirmed the net present value crosses zero exactly at the internal rate of return.
Explained how to reproduce the result with Excel’s NPV function without discounting the upfront cost.
Frequently Asked Questions now show on the page: 7 answers, checked in a page-by-page audit.
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