How to Calculate Net Present Value | Decide With One Number

Net present value is the total of each cash flow discounted to today, minus the up-front cost.

Net present value (NPV) answers a practical question: “If I pay money out now and money comes back later, what’s the deal worth in today’s dollars?” It’s used for business projects, real estate, equipment buys, and personal choices like paying for training that raises income.

NPV works because it treats timing honestly. A dollar received later is less flexible than a dollar in hand today. Discounting is the math that converts each cash flow to today’s value, so you can add them up without mixing apples and oranges.

What Net Present Value Measures

NPV turns a timeline into a single figure you can compare across options. You list expected cash flows by period (often years), pick a discount rate, discount each cash flow back to today, then subtract the initial cost.

When NPV is above zero, the discounted inflows outweigh the discounted outflows at your chosen rate. When it’s below zero, the deal doesn’t clear that hurdle rate. When you’re comparing options of similar scope, the one with the higher NPV is usually the better use of money.

The Core Formula

PV = Cash Flow ÷ (1 + r)^t

r is the discount rate per period. t is the period number. Period 0 has t = 0, so its discount factor is 1. That’s why the initial cost is not discounted.

Inputs You Need Before You Calculate

NPV is simple once your inputs are clean. Gather these items first.

Cash Flow Timeline

• Initial cost (Period 0): the amount you pay at the start, usually shown as a negative number.
• Periodic cash flows: net cash you expect to receive or pay each period.
• End cash flow: resale value, salvage value, or a final cleanup cost at the end.

Discount Rate

The discount rate is the yardstick that translates later dollars into today’s value. In a company setting, it often reflects a hurdle rate or cost of capital. For personal decisions, it may reflect the return you could reasonably get elsewhere, plus a cushion for risk.

If you work with public sector appraisal, official guidance may set or suggest discount rates and definitions. The U.S. OMB Circular A-94 defines discounting terms and the structure of benefit-cost analysis.

Period Length And Consistency

NPV only behaves when your timing is consistent. If your cash flows are annual, the discount rate must be annual. If your cash flows are monthly, use a monthly rate, or convert an annual rate into a monthly rate in a consistent way and keep all periods monthly.

How to Calculate Net Present Value For Real Cash Flows

This method works on paper or in a spreadsheet. Keep it in this order and you’ll avoid most errors.

Step 1: Write The Timeline

List periods in order: 0, 1, 2, 3, and so on. Period 0 is “now,” where the initial cost happens. Place each cash flow under its period.

Step 2: Discount Each Period

Compute the present value of each period’s cash flow using PV = Cash Flow ÷ (1 + r)^t. Do this for every period after 0. Period 0 stays as-is.

Step 3: Sum Present Values

Add all present values, including the initial cost (negative). The total is your NPV.

Step 4: Read The Result

A positive NPV means the project clears the rate you chose. A negative NPV means it doesn’t. If your cash flows are uncertain, run the calculation again with tighter inflows or a higher rate to see how easily the sign flips.

A Worked NPV Example With Clean Numbers

Assume you’re considering a machine upgrade. You pay $10,000 today. It produces $3,000 of net cash each year for four years, then you sell it for $1,500 at the end of year four. You choose an 8% annual discount rate.

• Year 0: −10,000
• Year 1: +3,000
• Year 2: +3,000
• Year 3: +3,000
• Year 4: +4,500 (3,000 + 1,500 resale)

Discount each year’s cash flow, then sum. If the sum is above zero, the upgrade clears 8%. If it’s below zero, it fails at that rate and you’d want a cheaper price, higher cash flows, or a lower hurdle rate.

What Moves NPV The Most

Two inputs drive most of the swing: the discount rate and the timing of cash flows.

Rate Shifts

A higher rate penalizes later cash flows more. A lower rate gives them more weight. That’s why teams argue about the rate: it quietly encodes risk and opportunity cost.

Delays

A one-year delay can hurt more than a small cut in annual cash flow. If revenue depends on permits, hiring, or build-out time, put those delays into the model instead of hoping they vanish.

Hidden One-Time Costs

Installation fees, training time, downtime during a switch, and maintenance spikes can flip NPV. If a cost is tied to the project, include it. If it’s truly sunk no matter what you do, keep it out.

Common NPV Setup Choices And What They Do

This table covers the modeling choices that trip people up, plus what each choice changes in the output.

Model Choice	What To Enter	Effect On NPV
Initial cost timing	Put the up-front outflow in Period 0	Stops accidental discounting of the initial payment
Operating cash flow	Use net cash after direct operating costs	Prevents profit-style inputs from overstating value
Working capital	Include cash tied up in inventory or receivables	Often lowers NPV early, then raises it when released
Taxes and depreciation	Model after-tax cash flows when taxes apply	Can change ranking across projects with different tax shields
Inflation handling	Keep cash flows and rate both nominal, or both real	Avoids mixing units that can distort the full model
End value	Add resale or shutdown costs in the final period	Captures end-of-life economics instead of dropping them
Uneven timing	Use dated cash flows when payments vary within a year	Reduces timing error versus equal-period assumptions
Stress pass	Run a second case with tougher inputs	Shows how fragile the sign is under pressure

Picking A Discount Rate You Can Defend

Discount rate debates get calmer when you tie the rate to a rule that fits your setting.

Business Projects

Start with your firm’s hurdle rate or cost of capital. If the project is riskier than the firm’s usual work, add a risk premium. If it’s safer, keep the rate closer to baseline. Write a short note next to the model that explains why you chose that rate.

Personal Decisions

Use a rate tied to your next-best option. If you could pay off a high-APR card, that’s a hard benchmark. If your alternative is a diversified investment account, use a conservative expected return that still feels realistic to you.

Public Sector Rules

Use the official guidance for your jurisdiction. The UK’s appraisal manual, HM Treasury’s Green Book, sets out discounting practice for government options.

Calculating NPV In Excel And Google Sheets

Spreadsheets can compute NPV fast, but the built-in NPV functions share a timing rule: they discount cash flows that occur after the first period. That’s why the Period-0 cost usually stays outside the function, then you add it in.

Excel Pattern

Microsoft’s Excel NPV function documentation describes the syntax and how values map to periods.

• Put the discount rate in one cell.
• List period cash flows starting at Period 1 in a row or column.
• Keep the Period-0 cost in its own cell.

Typical formula: =NPV(rate, period1:periodN) + period0

Google Sheets Pattern

The Google Sheets NPV function page follows the same timing assumption. Use the same structure: periods 1..N inside NPV(), then add the Period-0 cost separately.

Quick NPV Checks Before You Share The Number

These checks catch the mistakes that cause most “my NPV looks off” moments.

Check	What To Look For	Fix
Period 0 inside NPV()	Initial cost included in the function range	Move it out, then add it after the function
Rate matches period	Monthly cash flows with an annual rate	Convert the rate to the same period as cash flows
Sign convention	Outflows entered as positive numbers	Use negatives for cash paid out
Inflation mismatch	Nominal cash flows paired with a real rate	Keep inputs consistently nominal or consistently real
End cash flow missing	No resale value or shutdown cost	Add it to the final period cash flow
Double counting	The same cost appears in two lines	Assign each item once, then remove duplicates

A Reusable Workflow For Most Decisions

1. Write the cash flow story. What gets paid, what comes in, and when.
2. Turn that story into a timeline. Period 0, then each period’s net cash.
3. Pick a rate you can defend. Tie it to a rule and note it.
4. Run one stress case. Tighter inflows or a higher rate, then compare.

When you share NPV with someone else, share the assumptions right next to the number: rate, time horizon, and the three largest cash flow lines. That keeps the conversation grounded in inputs instead of vibes.