NPV / IRR & Payback Calculator
Find out whether an investment earns more than it costs in today's money, its internal rate of return, and how quickly it pays back. Free and instant, using discounted cash flow analysis.
Method Discounted cash flow (DCF) capital budgeting: NPV, IRR and payback
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How the investment appraisal works
The calculator uses discounted cash flow (DCF) analysis, the standard method for capital budgeting taught in corporate finance and in the CIMA and ACCA financial management syllabi.
- Discount each year's cash flow. Divide it by (1 + discount rate) raised to the number of years. Cash flows are assumed to arrive at the end of each year.
- Add up the present values and deduct the investment. The result is the net present value. Accept the project if it is positive.
- Find the IRR and payback. The IRR is the rate that makes the NPV zero; payback is the time it takes to get the investment back.
Worked example
A business can invest US$100,000 in new equipment that brings in 30,000, 35,000, 40,000, 25,000 and 20,000 over five years. Its required return is 12%.
| Year | Cash flow | Discount factor at 12% | Present value |
|---|---|---|---|
| 1 | 30,000 | 0.8929 | 26,785.71 |
| 2 | 35,000 | 0.7972 | 27,901.79 |
| 3 | 40,000 | 0.7118 | 28,471.21 |
| 4 | 25,000 | 0.6355 | 15,887.95 |
| 5 | 20,000 | 0.5674 | 11,348.54 |
| Present value of future cash flows | 110,395.20 | ||
| Less: initial investment | (100,000.00) | ||
| Net present value | 10,395.20 | ||
The NPV is positive, the IRR is 16.38% (above the 12% required), and the investment pays back in 2.88 years. But a 10% fall in every cash flow would make the NPV negative, so the full report rates this project marginal.
Frequently asked questions
What is net present value (NPV)?
NPV is the value today of all the cash a project will bring in, minus what it costs now. Future cash is discounted because a dollar next year is worth less than a dollar today. A positive NPV means the project earns more than your required return; a negative NPV means it earns less.
What discount rate should I use?
Use the return your business needs to justify the risk: often the cost of capital (the blended cost of your loans and the return owners expect), or a hurdle rate set by the board. Riskier projects deserve a higher rate. The report shows how the answer changes if the rate is two points higher or lower.
What is the internal rate of return (IRR)?
The IRR is the discount rate at which the NPV is exactly zero: the project's own rate of return. If the IRR is higher than your required return, the project adds value. When cash flows switch between positive and negative more than once, a project can have more than one IRR; the calculator warns you, and NPV is then the better guide.
What is the difference between payback and discounted payback?
Payback is how long it takes for the cash flows to repay the investment. Discounted payback does the same using the present values of the cash flows, so it is always a little longer and takes the time value of money into account. Neither looks at cash after the payback point, which is why NPV is the main decision measure.
What cash flows should I enter?
Enter the extra cash the project brings in each year minus the extra cash it costs, after tax. Leave out interest and loan repayments: the cost of finance is already reflected in the discount rate. Leave out costs you would pay anyway, and include any money you expect to get back by selling the assets at the end as the residual value.
What does the professional report include?
An investment appraisal paper with a clear recommendation (accept, reject or marginal), the discounted cash flow table, NPV, IRR, modified IRR, profitability index and both payback measures, an NPV profile chart, four scenarios and how far the cash flows can fall before the project stops adding value.
Results depend on the cash flow forecasts and discount rate you enter. They are not investment advice. For help appraising an investment, talk to our team.