About

Capital allocation requires precision. Selecting the wrong project ties up resources and incurs opportunity costs that can stifle growth. This tool evaluates the financial viability of distinct business initiatives by comparing their Return on Investment (ROI) and Net Present Value (NPV) side-by-side.

While ROI provides a simple percentage of profit relative to cost, it often ignores the timing of cash flows. A dollar received today is worth more than a dollar received five years from now due to inflation and earning potential. This is where NPV becomes critical. It applies a discount rate to future cash flows, translating them into today's value.

This application allows financial analysts and business owners to stress-test scenarios. By adjusting the discount rate (reflecting the cost of capital or risk premium) and projecting cash flows over a 10-year horizon, users can identify which project offers the superior risk-adjusted return.

Formulas

The core of financial project analysis relies on discounting future sums to the present.

Net Present Value (NPV):

NPV = n∑t=1 R_t(1 + i)^t − C₀

Where R_t is the net cash flow at time t, i is the discount rate, and C₀ is the initial investment.

Return on Investment (ROI):

ROI = Net ProfitCost of Investment × 100

Reference Data

Metric	Definition	Formula / Context	Typical Target
NPV	Net Present Value	Sum of discounted cash flows minus initial capital.	> 0 (Positive)
ROI	Return on Investment	Percentage of net profit relative to initial cost.	> 15% (Varies by sector)
IRR	Internal Rate of Return	Discount rate where NPV equals zero.	> WACC
Payback	Payback Period	Time required to recover the initial outlay.	< 3 Years
WACC	Weighted Avg Cost of Capital	Minimum return required by investors.	6% to 12%
Risk	Sensitivity	Impact of variable changes on outcome.	Low Variance
CapEx	Capital Expenditure	Funds used to acquire physical assets.	Project Specific
TVM	Time Value of Money	Concept that money is worth more now than later.	Discount Rate Basis

Frequently Asked Questions

ROI treats all dollars equally, regardless of when they are received. NPV accounts for the Time Value of Money. For a 10-year project, receiving $10,000 in Year 1 is significantly more valuable than receiving $10,000 in Year 10. NPV captures this discrepancy, providing a more accurate measure of value creation.

The discount rate typically represents the Weighted Average Cost of Capital (WACC) or the minimum rate of return required by investors. For higher-risk projects, a higher discount rate is applied to account for uncertainty. Common rates range from 8% for stable corporations to 20%+ for startups.

This tool focuses on NPV and ROI. While closely related, IRR is the specific rate that makes NPV zero. This tool requires you to input a target discount rate to see if the project creates value above that threshold.

Simply input negative values (e.g., -5000) for years where maintenance costs or reinvestments exceed revenue. The calculator treats these as outflows and discounts them accordingly.