What is a good discount rate to use?

Your weighted average cost of capital if you know it, otherwise the return you could earn on the next-best use of the money plus a margin for this project's risk. Stable cost-saving projects often use eight to twelve per cent, speculative ventures twenty or more.

Should I use NPV or IRR?

Use net present value to decide, because it measures value created in currency. Internal rate of return is useful for communicating a project's return as a percentage but is blind to project size and can mislead when ranking alternatives of different scale.

Why is discounted payback longer than simple payback?

Because discounting reduces the value of each future cash flow, so it takes more years for the discounted total to reach the initial investment. Simple payback treats a dollar in year five as worth the same as a dollar today, which is never true.

What does a negative NPV mean?

That at your chosen discount rate the project returns less than your required rate of return. It does not necessarily mean the project loses money in cash terms, only that the capital would be better deployed elsewhere at the return you have specified.

Why does IRR sometimes not exist?

When cash flows change sign more than once, for example a project needing major reinvestment mid-life, there can be multiple rates where net present value equals zero, or none. The result is then meaningless and you should rely on net present value instead.

Should I include depreciation?

No. Discounted cash flow analysis works on actual cash movements, and depreciation is an accounting allocation that involves no cash. Do include the tax effect of depreciation if it changes what you actually pay, since that is a genuine cash flow.

NPV and IRR Calculator

Works anywhere

Evaluates a capital investment using discounted cash flow, returning net present value, internal rate of return, profitability index and both simple and discounted payback periods. A $250,000 investment returning $70,000 a year growing at 3% over five years has a positive NPV at a 10% discount rate.

Results

Worked example. Edit the values and press Calculate

Net present value

$42,600

Positive: the project earns more than your required return and adds value.

Internal rate of return
16.13%
Above your 10.0% hurdle rate.
Profitability index
1.170
Above 1.0, so each dollar invested returns more than a dollar in today's money.
Total undiscounted cash flow
$391,640
Before any discounting. Always flattering, which is why it is not the decision metric.
Total discounted cash flow
$292,600
Simple payback period
3.44 years
Ignores the time value of money, so it is always optimistic.
Discounted payback period
4.31 years
The honest payback, counting cash at its present value.
Value created per dollar invested
$0.17
Net present value for each dollar of upfront cost, for ranking competing projects.

Why use this calculator

Any investment decision comes down to whether a dollar received in four years is worth more than the dollar you spend today, and the only honest way to answer that is to discount future cash back to present value. Payback period, the metric most small businesses actually use, ignores the time value of money entirely and treats a dollar in year five as identical to a dollar today, which systematically favours short-lived projects over better long-lived ones.

Net present value and internal rate of return are the standard tools finance teams and lenders expect, and presenting a capital request with both makes it far more likely to be taken seriously. This calculator produces all of them from a single set of inputs, with the year-by-year discounting shown so the arithmetic is auditable.

How to use it

Enter the total cash going out at the start, including installation, training and any working capital tied up, not merely the purchase price, since understating this is the most common way a business case is quietly made to look better than it is.
Enter the net cash flow you expect in the first year, meaning cash in minus cash out after tax, and exclude depreciation because it is an accounting charge rather than a cash cost.
Set how that flow grows or decays each year, the realistic project life, your discount rate or cost of capital, and finally what the asset will be worth at the end if you expect to sell it.

What each result means

Net present value: Today's value of all future cash flows less what you pay now. Anything above zero creates value at your required return; this is the primary decision metric.
Internal rate of return: The discount rate at which the project exactly breaks even. Compare it against your hurdle rate, but prefer NPV when ranking projects of different sizes.
Profitability index: Present value returned per dollar invested. Above 1.0 the project adds value, and it is the right metric when capital is rationed between competing projects.
Total undiscounted cash flow: The simple sum of every future inflow. It always looks better than the discounted figure, which is exactly why it should not drive the decision.
Total discounted cash flow: The present value of all future inflows before subtracting the initial cost. Compare it directly against what you are being asked to spend.
Simple payback period: How long until cumulative cash equals the investment, ignoring discounting. Useful as a rough risk measure but systematically optimistic.
Discounted payback period: The same thing counting cash at present value. Always longer than simple payback and a far more honest measure of recovery time.
Value created per dollar invested: Net present value scaled by the upfront cost, which lets you rank projects of very different sizes on a comparable basis.

The formula

Net present value = the sum over each year of that year's cash flow divided by (1 plus the discount rate) raised to the power of the year number, minus the initial investment

Internal rate of return is the discount rate at which net present value equals exactly zero, solved here by bisection.

Profitability index = (net present value plus the initial investment) divided by the initial investment

Simple payback is the point at which cumulative undiscounted cash flow reaches the initial investment, while discounted payback uses present values instead, interpolating within the year in which the crossover occurs.

How this number is used in practice

The discount rate is the input that decides the answer and the one most often chosen carelessly. For a business funded by debt and equity the theoretically correct figure is the weighted average cost of capital, but in practice most owner-operated businesses use a hurdle rate reflecting what else they could do with the money plus a margin for the risk of this particular project.

A stable cost-saving investment might be assessed at eight or ten per cent, while a speculative new product line might justify twenty-five. Running the calculation at two or three rates and seeing where the net present value turns negative tells you far more than a single point estimate.

Net present value and internal rate of return usually agree on whether to proceed, but they can disagree on which of two projects to choose, and when they do, net present value is correct. The internal rate of return is a percentage and therefore blind to scale, so a small project with a spectacular percentage return can beat a much larger project that creates several times more actual value.

If capital is genuinely constrained the profitability index resolves this, ranking projects by value created per dollar available rather than by percentage.

Internal rate of return also breaks down when cash flows change sign more than once, which happens whenever a project needs a significant reinvestment part-way through or carries a large decommissioning cost at the end. Mathematically there can then be several rates at which net present value equals zero, or none at all.

This calculator reports that the rate is not meaningful rather than returning one of several possible answers, which is what a naive implementation does and what quietly misleads people.

Worked examples

A $250,000 machine returning $70,000 in year one growing 3% a year over 5 years, 10% discount rate, $20,000 residual
Net present value of $42,600 and an internal rate of return of 16.13%, well above the 10% hurdle
The same project assessed at a 20% discount rate instead
Net present value turns negative at -$22,033, showing how sensitive the decision is to the cost of capital
A $100,000 investment returning a declining $35,000 a year over 4 years at 8%
Net present value of just $673 and an IRR of 8.32%, with discounted payback at 3.96 of the 4 years

When people use it

Deciding whether to buy equipment, a vehicle or a software system
Comparing competing capital projects when funds are limited
Building the financial section of a business case or board paper
Testing how sensitive a decision is to the cost of capital
Evaluating a property or business acquisition on a discounted cash flow basis

Tips

Include everything in the initial investment: installation, training, downtime during changeover and any working capital tied up.
Exclude depreciation from the cash flows. It is an accounting charge, not money leaving the business.
Run the calculation at several discount rates. Where NPV turns negative tells you how much room for error you have.
When NPV and IRR disagree about which project to pick, follow NPV. IRR is blind to project size.
Be conservative with project life. Assuming equipment produces cash for ten years when it is replaced at six is the most common overstatement.
Keep it consistent: either use real cash flows with a real discount rate, or nominal with nominal. Mixing them distorts everything.

What it assumes, and where it stops being accurate

Assumes cash flows arrive as a single lump at the end of each year. Monthly or quarterly receipts are worth slightly more than this shows.
Assumes a constant discount rate across the whole project life, whereas a real cost of capital changes with rates and risk.
Cash flows grow or decline at a single steady rate. Real projects rarely follow a smooth curve.
Assumes the figures entered are after tax and exclude depreciation, which is an accounting charge rather than a cash movement.
Internal rate of return assumes interim cash flows are reinvested at that same rate, which is usually optimistic. The modified internal rate of return addresses this.
Ignores inflation unless you have built it into both the cash flows and the discount rate consistently. Mixing real and nominal figures is a common error.

Terms used on this page

Net present value: Today's value of all future cash flows less the upfront investment, at a chosen discount rate.
Internal rate of return: The discount rate at which a project's net present value is exactly zero.
Discount rate: The required return used to convert future cash into present value.
Profitability index: Present value of inflows divided by the initial investment; above 1.0 creates value.
Terminal value: What an asset or business is worth at the end of the projection period.

Questions people ask

What is a good discount rate to use?: Your weighted average cost of capital if you know it, otherwise the return you could earn on the next-best use of the money plus a margin for this project's risk. Stable cost-saving projects often use eight to twelve per cent, speculative ventures twenty or more.
Should I use NPV or IRR?: Use net present value to decide, because it measures value created in currency. Internal rate of return is useful for communicating a project's return as a percentage but is blind to project size and can mislead when ranking alternatives of different scale.
Why is discounted payback longer than simple payback?: Because discounting reduces the value of each future cash flow, so it takes more years for the discounted total to reach the initial investment. Simple payback treats a dollar in year five as worth the same as a dollar today, which is never true.
What does a negative NPV mean?: That at your chosen discount rate the project returns less than your required rate of return. It does not necessarily mean the project loses money in cash terms, only that the capital would be better deployed elsewhere at the return you have specified.
Why does IRR sometimes not exist?: When cash flows change sign more than once, for example a project needing major reinvestment mid-life, there can be multiple rates where net present value equals zero, or none. The result is then meaningless and you should rely on net present value instead.
Should I include depreciation?: No. Discounted cash flow analysis works on actual cash movements, and depreciation is an accounting allocation that involves no cash. Do include the tax effect of depreciation if it changes what you actually pay, since that is a genuine cash flow.

Use this with

NPV and IRR Calculator answers one part of the question. These pick up where it stops: ROI Calculator, Break-Even Calculator, Investment Return Calculator and Compound Interest Calculator.

Where these figures come from

Works anywhereLast reviewed 2026-09·How we build and check calculators

This calculation is jurisdiction-neutral arithmetic. No country-specific rules are applied.

US Small Business Administration. Guidance on capital investment planning and business cases
business.gov.au. Australian guidance on financing and evaluating business investment
CFA Institute. Standards and reference material on discounted cash flow analysis

NPV and IRR Calculator produces an estimate for general information. It is not financial, tax, medical, legal or engineering advice. read the full disclaimer. Spotted a wrong number? Report it and it gets fixed. The form picks up this calculator and the inputs you used.