Advanced Finance
NPV, IRR & Payback Calculator
The four numbers a capital request gets judged on, from one set of cash flows. NPV says how much value the project adds, IRR says the rate it earns, payback says how long your money is at risk, and the profitability index says how much value you get per dollar committed when you cannot fund everything.
Inputs
- Initial investment
- Year 1 cash flow
- Year 2 cash flow
- Year 3 cash flow
- Year 4 cash flow
- Year 5 cash flow
- Discount rate
How to use this calculator
- Enter the upfront investment as a positive number and the cash flow you expect in each of the next five years. Use cash, not profit: depreciation is not a cash flow.
- Set the discount rate to your cost of capital, or higher if this project is riskier than the business as a whole.
- Read NPV first. Positive means the project earns more than the discount rate; that is the whole test. The size of the number is the value it adds, in today's money.
- Use IRR to compare projects of similar size, and the profitability index to rank them when capital is short. It says how much value you get per dollar committed.
- Check both payback lines. The discounted payback is always the longer one, and it is the one that tells you how long your money is genuinely at risk.
What each term means
- NPV
- Present value of the cash flows minus what you paid. Positive means the project beats the alternative you priced into the discount rate.
- IRR
- The discount rate at which NPV is exactly zero: the annual return the cash flows themselves earn. Cannot be solved directly; it has to be searched for.
- Payback period
- How long until cumulative cash flow repays the investment. Ignores everything that happens after, which is its main weakness.
- Discounted payback
- The same, but each year's cash flow is discounted first. Always longer than simple payback, and always more honest.
- Profitability index
- Present value of inflows divided by the investment. Above 1 is the same signal as a positive NPV, but it ranks projects when you cannot fund them all.
Educational disclaimer: Outputs are simplified educational estimates built from the numbers you enter — they are not financial, legal, tax, or investment advice, and real decisions deserve verified figures and qualified professionals.