How do you calculate NPV and IRR by hand?

For NPV, divide each year's cash flow by (1 + r) raised to the year number to get its present value, add those up, then subtract the initial investment. If the total is positive, the project earns more than your required return. IRR is the discount rate that makes NPV exactly zero — you find it by trial and error (or, here, by bisection): try a rate, see if NPV is positive or negative, and close in until NPV hits zero.

What is a good IRR for a small business project?

There is no universal number — a project is worth doing when its IRR clears your own required return (your cost of capital or the return you could get elsewhere). For a Sri Lankan small business, that benchmark is often a fixed-deposit or borrowing rate plus a risk margin, so a 12–20% required return is common. The cleaner test is simply NPV: if NPV is positive at your required rate, the IRR already beats it.

Should I accept a project if NPV is positive but IRR is below my rate?

That combination almost never happens for a normal project — a positive NPV at rate r means the IRR is above r by definition. If the calculator shows them disagreeing, it is usually a non-conventional cash-flow stream (the flows change sign more than once) where multiple IRRs exist. In that case follow NPV: it is the authoritative criterion for accept/reject and for choosing between mutually exclusive projects.

What is the difference between payback period and discounted payback period?

Payback period counts how long until the cumulative cash flows simply add back up to the initial investment, ignoring the time value of money. Discounted payback does the same but adds up the discounted cash flows, so it is always longer because future rupees are worth less today. Discounted payback is the more honest measure, but neither accounts for cash flows after recovery — that is why NPV is the primary tool.

What discount rate should I use for a project in Sri Lanka?

Use the return you genuinely require to part with the money. If you would otherwise repay a loan, use the loan rate; if you would otherwise leave it in a fixed deposit, use that rate plus a margin for the project's extra risk. Keep the rate and the cash flows on the same basis — if your cash flows are in today's rupees (real), use a real rate; if they include expected inflation (nominal), use a nominal rate.

What is the profitability index and when is it useful?

The profitability index (PI) is the sum of discounted inflows divided by the initial investment. PI above 1 means accept — it is just NPV expressed as a ratio. It is most useful when you are rationing capital and need to rank projects by value created per rupee invested, rather than by absolute NPV.

Does this calculator handle tax, depreciation or inflation?

No — you enter the net after-tax cash flows yourself, so model tax and depreciation before typing the numbers in. It also does not convert between real and nominal terms: keep your rate and cash flows consistent. For Sri Lankan income tax there are dedicated tools on this site, and for inflation adjustments link through to the inflation calculator.

Why does the IRR sometimes show "n/a" or a warning?

IRR only exists when the cash-flow stream changes sign — money out, then money in. If every entry has the same sign (for example all inflows with no outlay), no rate sets NPV to zero, so it shows n/a. If the stream changes sign more than once (an outflow appears mid-project), several IRRs can exist; the tool flags this and you should rely on NPV.

Finance · Capital budgeting

NPV & IRR Calculator — Investment Appraisal

Enter an initial outlay, your required return, and the expected cash flows to get net present value, internal rate of return, payback, discounted payback and the profitability index — with a plain-English accept-or-reject verdict and a year-by-year DCF table. LKR-first, no signup, sources cited below.

By Induwara Ashinsana— Executive Director, Ryzera TechnologiesUpdated Jun 26, 2026

Investment appraisalNPV · IRR · payback · PI

Formula cross-checked

Initial investment (Rs)

The up-front outlay at the start (period 0).

Discount rate / required return

Per year. Your hurdle rate or cost of capital.

Period length

Labels only — the math is the same.

Currency symbol

Display only — values are never converted.

Cash flow per year

1Rs

2Rs

3Rs

4Rs

5Rs

5 of 30 periods

Accept — NPV is positive at Rs 81,433.

IRR (15.2%) exceeds your 12.0% required return. Payback is 3.33 years.

Net present value

Rs 81,433

Adds value at your rate

Internal rate of return

15.2%

vs 12.0% required

Profitability index

1.081

PI > 1 → accept

Payback period

3.33 years

Undiscounted

Discounted payback

4.52 years

On a present-value basis

Sum of present values

Rs 1,081,433

Σ discounted inflows (before outlay)

Discounted cash flows

012345

OutlayDiscounted inflow (PV)

Year-by-year breakdown

Year	Cash flow	Disc. factor	Present value	Cum. (undisc.)	Cum. (disc.)
0	Rs -1,000,000	1.0000	Rs -1,000,000	Rs -1,000,000	Rs -1,000,000
1	Rs 300,000	0.8929	Rs 267,857	Rs -700,000	Rs -732,143
2	Rs 300,000	0.7972	Rs 239,158	Rs -400,000	Rs -492,985
3	Rs 300,000	0.7118	Rs 213,534	Rs -100,000	Rs -279,451
4	Rs 300,000	0.6355	Rs 190,655	Rs 200,000	Rs -88,795
5	Rs 300,000	0.5674	Rs 170,228	Rs 500,000	Rs 81,433
Net present value			Rs 81,433

Cumulative columns net off the initial outlay, so the period where each crosses zero is the (discounted) payback point. See the sources for the formula definitions.

Method follows the NPV / IRR / payback definitions in Brealey & Myers and the CFA capital-budgeting reading; the even-cash-flow NPV is cross-checked against the closed-form annuity formula. Sources are listed below the calculator.

How it works

This is a discounted-cash-flow appraisal. Money in the future is worth less than money today, so every expected cash flow is converted to today's value before the decision is made. The methodology follows the standard definitions in Brealey & Myers' Principles of Corporate Financeand the CFA Program's capital-budgeting reading.

Write C0 for the initial investment (entered as a positive number, treated as an outflow at period 0), r for the discount rate as a decimal, and CF_t for the cash flow in period t. The tool computes:

Discount factor for each period: DF_t = 1 / (1 + r)^t.
Present value of each flow: PV_t = CF_t × DF_t.
Net present value: NPV = (Σ PV_t) − C0. The decision rule is to accept when NPV is greater than zero, because a positive NPV means the project earns more than your required return.
Internal rate of return is the rate ithat makes NPV zero. There is no closed-form solution, so the tool brackets the first point where NPV crosses zero and then bisects to a tolerance of 1e-7 (up to 200 iterations). If the cash-flow stream never changes sign it reports "n/a"; if it changes sign more than once it warns that several IRRs may exist.
Payback period walks the cumulative undiscounted cash flow until it recovers C0, interpolating within the final period. Discounted payback does the same on the discounted cash flow, so it is always the longer figure.
Profitability index: PI = (Σ PV_t) / C0; accept when PI is above 1. It is NPV expressed per rupee invested, useful for ranking projects under a capital limit.

NPV is the primary criterion. When NPV and IRR disagree — possible for non-conventional streams or between mutually exclusive projects — the tool surfaces the conflict and defers to NPV, in line with the CFA NPV-over-IRR rule. For even cash flows the NPV is independently cross-checked against the closed-form present-value-of-an-annuity formula PV = CF × [1 − (1 + r)^−n] / r, so you can trust the headline figure to the rupee.

Worked examples

Even cash flows — a Rs 1,000,000 oven

Initial Rs 1,000,000 · 12% required return · Rs 300,000/yr for 5 years

PV year 1: 300,000 / 1.12 = 267,857.14
PV year 2: 300,000 / 1.12² = 239,158.16
PV year 3: 300,000 / 1.12³ = 213,534.07
PV year 4: 300,000 / 1.12⁴ = 190,655.42
PV year 5: 300,000 / 1.12⁵ = 170,228.06
Σ PV = 1,081,432.86
NPV = 1,081,432.86 − 1,000,000 = Rs 81,433
PI = 1,081,432.86 / 1,000,000 = 1.081
Payback = 1,000,000 / 300,000 = 3.33 years
IRR ≈ 15.2% (NPV is +5,647 at 15%, −17,709 at 16%)
Verdict: NPV > 0 and IRR (15.2%) > 12% → Accept

Uneven cash flows — a small-business project

Initial Rs 500,000 · 10% required return · 100k / 150k / 200k / 250k

PV: 90,909.09 + 123,966.94 + 150,262.96 + 170,753.36 = 535,892.35
NPV = 535,892.35 − 500,000 = Rs 35,892
PI = 535,892.35 / 500,000 = 1.072
Payback: 450,000 recovered by year 3; (500,000 − 450,000)/250,000 = 3.20 years
Discounted payback: 365,138.99 by year 3; (500,000 − 365,138.99)/170,753.36 = 3.79 years
IRR ≈ 12.8% (NPV is +10,103 at 12%, −2,095 at 13%)
Verdict: NPV > 0 and IRR (12.8%) > 10% → Accept

Edge case — money never recovered

Initial Rs 1,000,000 · 10% required return · Rs 100,000/yr for 3 years

Total undiscounted inflows = 300,000, far below the 1,000,000 outlay
Σ PV = 248,685; NPV = 248,685 − 1,000,000 = −Rs 751,315
PI = 0.249 (well under 1)
Payback = not recovered within 3 years (shown as —)
IRR ≈ −42% (the project loses money even before discounting)
Verdict: NPV < 0 → Reject

Frequently asked questions

Sources & references

NPV, IRR, payback and profitability index are universal corporate-finance definitions (no single rate-setting authority); the canonical reference is Brealey, Myers & Allen, Principles of Corporate Finance. The formulas and the IRR solver on this page were last cross-checked against the worked examples on 2026-06-26.

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