NPV & IRR Financial Calculator
Evaluate investment projects with precision. Calculate Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index (PI) across multi-year cash flows.
Project Cash Flows
Capital Decision Matrix
| Period | Nominal Flow | Discount Factor | Discounted PV |
|---|
What is NPV and IRR in Capital Budgeting?
Net Present Value (NPV) and Internal Rate of Return (IRR) are the twin gold standards of corporate valuation. NPV discounts all future expected project cash flows back to today's dollars using the company's cost of capital (WACC) and subtracts initial investment costs. A positive NPV indicates the project adds net economic value. IRR is the specific break-even discount rate that forces the NPV of all cash flows to equal exactly zero.
Decision Rules for Corporate Projects
NPV Decision Rule
If NPV > 0, accept the project because it enhances shareholder wealth. If NPV < 0, reject because return fails to cover the opportunity cost of capital.
IRR Decision Rule
If IRR > Hurdle Rate (WACC), accept the project. When NPV and IRR conflict on mutually exclusive projects, financial theory dictates selecting the higher NPV project.
Frequently Asked Questions
Why might NPV and IRR give conflicting recommendations?
NPV assumes future cash inflows can be reinvested at the cost of capital (a conservative, realistic rate), while IRR mathematically assumes cash inflows are reinvested at the IRR itself (often unrealistically high).
What is Profitability Index (PI)?
The Profitability Index is the ratio of the present value of future cash inflows divided by initial cost. A PI above 1.0 confirms profitability and helps rank projects under capital rationing.