Capital Budgeting Calculator (NPV, IRR, Payback, PI)

Not sure if a project is worth it? Use our free capital budgeting calculator to instantly compute NPV, IRR, Payback, and more—built for clarity, accuracy, and students.

By YouthBudget • Last updated: • Educational use only.

Project Details

Your required rate of return or cost of capital
The upfront cost of the project
How long the project will generate cash flows
Enter the annual cash inflow amount
Expected value of assets at project end
If provided, tax effects will be calculated

Results

Enter your project details and click Calculate to see results

What is Capital Budgeting? +

Capital budgeting is the process that businesses use to evaluate potential major projects or investments. It helps companies determine which long-term investments are worth pursuing based on their potential to generate returns over time.

Common examples include building a new factory, purchasing new equipment, or developing a new product line. The goal is to allocate limited resources to projects that will provide the best return on investment.

When to use NPV vs IRR vs Payback vs PI +
  • NPV (Net Present Value): Best for comparing projects of different sizes and timeframes. Always use NPV when projects have different scales or durations.
  • IRR (Internal Rate of Return): Useful for understanding the percentage return of a project. Can be misleading with non-conventional cash flows or when comparing mutually exclusive projects.
  • Payback Period: Good for assessing liquidity risk - how quickly you recover your initial investment. Ignores time value of money and cash flows beyond payback.
  • Discounted Payback: Improved version of payback that accounts for time value of money.
  • PI (Profitability Index): Helpful when capital is constrained - shows value created per unit of investment.
Assumptions & Limitations +
  • Cash flows are estimated and may not reflect actual results
  • Discount rate is assumed constant over the project life
  • Inflation is not explicitly accounted for in calculations
  • Tax calculations are simplified and may not reflect specific tax situations
  • All cash flows occur at year-end (convention)
  • This tool is for educational purposes only
Worked Example +

Scenario: A company invests $10,000 in equipment with a 5-year life, expecting annual cash inflows of $3,000. Discount rate is 10%.

Calculation:

  • NPV = -10,000 + 3,000/(1.1) + 3,000/(1.1)² + 3,000/(1.1)³ + 3,000/(1.1)⁴ + 3,000/(1.1)⁵ = $1,372.36
  • IRR = 15.2% (rate where NPV = 0)
  • Payback = 3.33 years (10,000 ÷ 3,000)
  • Discounted Payback = 4.25 years
  • PI = 1.14 (11,372.36 ÷ 10,000)

Since NPV > 0 and IRR > discount rate, this would be an acceptable project.

FAQs +

Which metric should I trust most?

NPV is generally considered the most reliable metric because it directly measures the value added to the firm in absolute terms. It works well for comparing projects of different sizes and timeframes.

Why can IRR be misleading?

IRR can be problematic with non-conventional cash flows (multiple sign changes), when comparing mutually exclusive projects of different sizes, or when reinvestment assumptions are unrealistic. In these cases, Modified IRR (MIRR) may be preferable.

What discount rate should I use?

Use your company's Weighted Average Cost of Capital (WACC) as a starting point. This represents the minimum return required by all capital providers. For personal projects, use your required rate of return.

What if my cash flows vary each year?

Use the "Different by year" option to input unique cash flow amounts for each year. The calculator will handle the variation automatically in all calculations.

Does this include taxes & depreciation?

Yes, optional inputs for tax rate and depreciation method are available. When used, the calculator will adjust cash flows for tax effects and depreciation tax shields.