About the IRR & NPV
Net present value (NPV) discounts every future cash flow of a project back to today at your hurdle rate and subtracts the investment; a positive NPV means the project earns more than the hurdle. The internal rate of return (IRR) is the rate at which the NPV is exactly zero — the project's own return, which you compare with your cost of capital. Payback is the number of years until the cumulative cash flow turns positive.
Enter the investment (a negative year-zero flow) and the net cash flow for each year — profit after tax plus depreciation, less any further capital spending. The calculator gives the NPV at the discount rate you choose, the IRR and the payback period. The projection engine in the DPR uses the same definitions.
IRR can mislead when cash flows change sign more than once or when projects differ in size; NPV at a sensible rate is the safer decision rule.
How to use it
- 1Enter the investment as year 0 (negative).
- 2Enter the net cash flow for each year of the project.
- 3Enter your hurdle or discount rate (the WACC calculator gives one).
- 4Read the NPV, the IRR and the payback period.
How this is calculated
NPV = Σ CFₜ ÷ (1 + r)ᵗ for t = 0…n IRR = the rate r at which NPV = 0 (solved numerically) Payback = the year in which cumulative cash flow first becomes ≥ 0, interpolated within the year
Frequently asked questions
What discount rate should I use?
Your cost of capital — the WACC — or, for a bank-funded project, at least the loan rate plus a margin for risk. A higher rate makes distant cash flows worth less and is the conservative choice.
Why does the IRR show as unavailable?
An IRR exists only when the cash flows change sign — an outflow followed by inflows. If every year is positive or negative, or the flows are all tiny, there is no rate that makes the NPV zero.
Should I include the loan and its EMIs in the cash flows?
For a project IRR, no — use the unlevered cash flows (before financing) and compare the IRR with the WACC. For an equity IRR, use the owners' cash flows after debt service.
Is a two-year payback good?
Payback ignores everything after the payback year and the time value of money, so use it as a liquidity check, not the decision. Two years is quick for most capital projects; NPV and IRR tell you whether the later years justify the investment.