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Finance & Business · pattern A, Numeric fields

Net present value of a level cash flow.

Enter an initial outlay, an annual cash inflow, the discount rate and the project life for NPV, with the payback period and profitability index alongside.

Inputs

The formula used

NPV = Σ CFₜ ÷ (1 + r)ᵗ − initial outlay

This assumes an equal annual cash flow, which is the annuity case. Uneven flows must be discounted year by year.

Net present value

3,071.01

Present value of the inflows
53,071.01
Undiscounted total inflow
70,000.00
Discounting cost
16,928.99
Simple payback period
3.571 years
Profitability index
1.0614
Decision
accept — positive NPV at this discount rate

The discount rate decides the answer.

NPV is only as meaningful as the rate you discount at, and small changes in that rate flip decisions on long projects. That is why exam questions specify the cost of capital and why sensitivity analysis is expected in any serious appraisal: report NPV at several rates rather than one, and say which assumption the decision rests on.

Questions about npv

What discount rate should I use?
The project's cost of capital, or the return available on a comparable alternative. In coursework it is given; in practice it is contested.
Why is NPV preferred to payback?
Because payback ignores everything after the break-even point and ignores the time value of money entirely. NPV uses the whole cash-flow profile.
What does a zero NPV mean?
The project returns exactly the discount rate — acceptable but not value-creating. That rate is by definition the internal rate of return.

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