The Net Present Value (NPV) Calculation

Net present value (NPV) is a return routinely used by real estate investors during a real estate analysis to gauge the profitability of a real estate investment because it does account for time value of money – that is, it accounts for the present value of future receipts anticipated from the investment.

What is NPV?

Net present value is the difference (expressed as a dollar amount) between the present value of all future cash flows discounted at the desired rate of return and the amount of cash investment.

Formula

npv-formula

How to Compute

To make the NPV calculation you will need a financial calculator like HB10B, an Excel spreadsheet, or a calculation solution like iCalculator. It is not something you can calculate in your head.

Example

Say you want a 6.25% rate of return to invest $100,000 for a property projecting annual cash flows of 2,000, 2,300, 2,500, 2,800, 3,000, plus cash proceeds of 130,000 anticipated from a future sale. Your intention is to calculate the net present value in order to know whether this real estate investment will meet your desired goal.

  • HP Financial Calculator – Refer to the owner’s manual. Requires about twelve keystrokes and entries.
  • MS Excel – NPV(A1,A3:A7)+A2 where A1 is rate, A3:A7 are the cash flows, A2 is the initial investment.
  • iCalculator – discussed below.
iCalculator

Allow me to show you a much easier way using my iCalculator solution. Just fill in the form and click. (Click image to enlarge).

net-present-value


Source: iCalculator by ProAPOD

Result

The net present value we calculated based upon the projected cash flows given for the rental property in our example resulted in a positive dollar amount. Therefore your desired rate of return of 6.25% was exceeded.

So You Know

iCalculator makes dozens of real estate calculations with the formulas. You can try it risk-free and save 50% (you pay just $24.95). Click here to learn more and get the discount.