Capital Budgeting Calculator

This capital budgeting calculator appraises an investment project against the four measures finance teams reach for most often, all from one set of inputs. You enter the upfront cost of the project, the discount rate that reflects your cost of capital or required return, and the cash the project is expected to generate in each of the next five years. The calculator then discounts those future cash flows back to today and reports the net present value, the dollar value the project adds after covering your required return. It solves for the internal rate of return, the single discount rate at which the project exactly breaks even, so you can compare it against your hurdle rate. It measures the payback period, the point at which the running total of cash flows repays the initial outlay, giving a quick read on how long your money is tied up. Finally it computes the profitability index, the present value of the inflows divided by the cost, which is handy for ranking projects when the budget will not stretch to all of them. Bringing these together lets you judge a single project or line up several and pick the strongest. Treat the results as a decision aid built on your own estimates, not a guarantee, since the answers are only as good as the cash flow forecasts you feed in.

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Year 1
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Year 2
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Year 3
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Year 4
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Year 5
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Enter the cash the project produces each year as a positive number. Leave a year at zero if there is no cash flow.

$13,724
net present value at 10%
Internal rate of return15.24%
Payback period3.33 years
Profitability index1.14

A positive NPV and an IRR above your discount rate both point to a project that adds value. The results depend entirely on your cash flow estimates and are a decision aid, not advice.

How it works

Each year's cash flow is discounted back to today by dividing it by one plus the discount rate raised to the power of the year. Adding those present values and subtracting the initial investment gives the net present value. The internal rate of return is found by searching for the discount rate that makes the net present value exactly zero, which the calculator does by narrowing the range until it converges. The payback period counts how many years of cash flow it takes to recover the initial outlay, with the final part-year worked out from the fraction still owing. The profitability index divides the present value of the inflows by the initial cost, so anything above 1 signals value created.

Worked example

A project costs $100,000 up front and is expected to return $30,000 a year for five years, and you use a 10% discount rate. Discounting the five $30,000 cash flows at 10% gives a present value of about $113,724, so the net present value is $113,724 less $100,000, which is about $13,724. The internal rate of return, the rate that would drive that NPV to zero, is about 15.24%, comfortably above the 10% hurdle. The running total of cash reaches $90,000 after three years and needs $10,000 of the fourth year's $30,000, so the payback period is about 3.33 years. The profitability index is $113,724 divided by $100,000, about 1.14, meaning $1.14 of value for every dollar invested.

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Frequently asked questions

What does a capital budgeting calculator do?

It appraises an investment project against the four standard tests at once: net present value, internal rate of return, payback period and profitability index. You enter the upfront cost, a discount rate and the cash the project throws off each year, and it reports whether the project adds value and how quickly it pays for itself.

Should I accept a project if NPV is positive?

A positive net present value means the project earns more than your discount rate, so it adds value and passes the main test. Check the internal rate of return sits above your required return and that the payback period fits your horizon, then rank competing projects by NPV or profitability index when budgets are limited.

What is the profitability index?

The profitability index is the present value of the future cash flows divided by the initial investment. A value above 1 means the project creates value for every dollar put in, and it is useful for ranking projects when you cannot fund them all. An index of 1.14 means 1.14 dollars of value for each dollar invested.