NPV & IRR Project Evaluator
Whether an investment is worth making, in today’s money.
Replaces: Corporate finance templates and paid modelling add-ins
How to use it
Enter what the project costs upfront, what it returns each year, and the return you require. Every future amount is discounted back to today, because money arriving in year six is worth less than the same amount now. If the total comes to more than the investment, the project creates value.
Where the number comes from
- Each year’s cash flow is the year-one figure grown at the rate you set, with any terminal value added in the final year.
- The discount factor for year t is 1 ÷ (1 + rate) to the power t.
- Net present value is the sum of every discounted flow, less the upfront investment.
- The internal rate of return is the discount rate at which NPV is exactly zero, solved numerically by bisection.
- The profitability index is the present value of returns divided by the investment — value created per unit invested.
- Simple payback uses undiscounted cash; discounted payback uses present values, and always takes longer.
What goes wrong
The part most calculators leave out.
- The forecast cash flows are the whole answer, and they are guesses. A model this precise built on estimates that loose gives false confidence — vary the inputs and see how quickly the verdict flips.
- IRR ignores scale. A 40% return on 10,000 creates less value than a 15% return on 5m, which is why NPV decides between mutually exclusive projects and IRR does not.
- IRR also assumes interim cash flows are reinvested at the IRR itself, which is rarely available. Where that matters, a modified IRR is the better measure.
- Cash flows that change sign more than once can produce several valid IRRs or none at all. The calculator reports no solution rather than picking one arbitrarily.
- Terminal value is often the largest single component and the least reliable. If the verdict depends on it, the verdict is a guess about resale prices years out.
- The discount rate must reflect the risk of this project, not the company average. Applying a corporate hurdle to a much riskier venture systematically approves things it should not.
- Inflation must be handled consistently: either discount nominal cash flows at a nominal rate, or real flows at a real rate. Mixing them is a common and material error.
Positive NPV, and still the wrong project
A 400,000 investment returns 105,000 in year one, growing 3% a year for six years, with 60,000 of residual value at the end. Total cash returned is about 739,000 — nearly double the outlay, which sounds decisive. Discounted at a 12% required return, the present value of those returns is roughly 491,000, so NPV is about 91,000 and the IRR around 19%. It clears the hurdle comfortably. But simple payback is year four, and discounted payback does not arrive until year six — the final year of the project. On a present-value basis the capital is at risk for essentially the entire life, and year five still sits marginally underwater. A business with a tighter alternative, or one that might need that cash sooner, can rationally decline a positive-NPV project on those grounds alone.
Questions
- What discount rate should I use?
- The return you could get on an alternative of similar risk — usually your weighted average cost of capital for ordinary projects, and something higher for riskier ones. Using one company-wide rate for everything systematically over-approves risky projects and rejects safe ones.
- Should I use NPV or IRR?
- NPV when choosing between projects, because it measures value created and accounts for scale. IRR is useful as a communication tool because a percentage is intuitive, but it can rank projects wrongly and breaks entirely on unconventional cash flows.
- What does a profitability index above 1 mean?
- That the present value of the returns exceeds the investment — the same conclusion as a positive NPV, expressed as a ratio. It is most useful when capital is rationed and you need to rank projects by value per unit invested.
- Why is discounted payback always longer?
- Because future cash is worth less than face value, so the cumulative total climbs more slowly. It is the more honest of the two measures when the question is how long your money is genuinely at risk.
- Does anything I type get sent anywhere?
- No. The whole calculation runs in your browser. Nothing is transmitted, stored, or logged, and there is no account to create.
Last updated .
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