# Capex NPV and Profitability Index Calculator

> Source: https://netray.co/tools/capex-npv-profitability-index-calculator
> Publisher: Netray (netray.co), AI and integration engineering for ERP and manufacturing systems.
> Section: Free Tools

## Short answer

Evaluate a machine or plant investment with net present value, profitability index and a sweep of NPV across discount rates.

## Category

cost-finance

## Industry

Discrete Manufacturing

## Audience

- CFO
- Controller
- Plant manager
- FP&A

## Tool

**Kind:** calculator

**Currency:** $

**Inputs:**

#### Initial investment

**Key:** invest

**Type:** number

**Default:** 850000

**Min:** 0

**Step:** 5000

**Unit:** $

**Help:** Equipment, installation, tooling, commissioning and training.

#### Net cash flow year 1

**Key:** cf1

**Type:** number

**Default:** 180000

**Step:** 5000

**Unit:** $

**Help:** After tax, after incremental operating cost.

#### Net cash flow year 2

**Key:** cf2

**Type:** number

**Default:** 240000

**Step:** 5000

**Unit:** $

#### Net cash flow year 3

**Key:** cf3

**Type:** number

**Default:** 260000

**Step:** 5000

**Unit:** $

#### Net cash flow year 4

**Key:** cf4

**Type:** number

**Default:** 260000

**Step:** 5000

**Unit:** $

#### Net cash flow year 5

**Key:** cf5

**Type:** number

**Default:** 250000

**Step:** 5000

**Unit:** $

#### Salvage value at end of year 5

**Key:** salvage

**Type:** number

**Default:** 90000

**Min:** 0

**Step:** 5000

**Unit:** $

#### Discount rate (hurdle rate)

**Key:** rate

**Type:** slider

**Default:** 10

**Min:** 1

**Max:** 30

**Step:** 0.5

**Unit:** %

**Outputs:**

#### Present value of inflows

**Key:** pv

**Expr:** cf1 / pow(1 + rate / 100, 1) + cf2 / pow(1 + rate / 100, 2) + cf3 / pow(1 + rate / 100, 3) + cf4 / pow(1 + rate / 100, 4) + (cf5 + salvage) / pow(1 + rate / 100, 5)

**Format:** currency

#### Net present value

**Key:** npv

**Expr:** pv - invest

**Format:** currency

**Primary:** true

#### Profitability index

**Key:** pi

**Expr:** if(gt(invest,0), pv / invest, 0)

**Format:** decimal

**Primary:** true

**Description:** Above 1.00 means the project earns more than the hurdle rate.

#### Total undiscounted return

**Key:** undisc

**Expr:** cf1 + cf2 + cf3 + cf4 + cf5 + salvage - invest

**Format:** currency

**Chart:**

#### NPV across discount rates

**Type:** line

**X:** rate

**From:** 1

**To:** 30

**Steps:** 30

**Series:**

- npv

**Disclaimer:** Cash flows must be incremental, after tax and in nominal terms consistent with the discount rate. Inflation, financing and risk adjustments are your responsibility.

## Content

**Intro:** Net present value answers one question: after discounting future cash at your required return, does this machine create or destroy value? This calculator handles a five year horizon with salvage and shows how sensitive the answer is to the hurdle rate.

**Sections:**

#### How to use the calculator

**Body:** Enter the full up-front cost, then the incremental net cash flow you expect in each year: extra margin, labor savings, scrap reduction, less the added maintenance, power and tax. Add expected salvage in year five and set your hurdle rate, which is normally your weighted average cost of capital plus a risk premium for the project. The NPV and profitability index update instantly, and the chart shows where NPV crosses zero, which is the project IRR.

**Bullets:**

- Include working capital build, if any, as an outflow in the year it occurs
- Use after-tax cash flows and include the depreciation tax shield
- Do not include sunk costs such as a feasibility study already paid
- Run a downside case with cash flows cut by 20 percent

#### Formula and decision rule

**Body:** NPV = sum of cash flow in year t divided by (1 + r) to the power t, minus the initial investment. Accept the project when NPV is positive. The profitability index is present value of inflows divided by investment and is useful for ranking projects when capital is rationed: pick the highest PI first until the budget is spent. The point where the chart line crosses zero is the internal rate of return, so you can read IRR without a spreadsheet function.

#### Worked example

**Body:** At the default 10 percent rate, the inflows are worth about 934,000 against an 850,000 investment, an NPV near 84,000 and a profitability index of about 1.10. Move the slider to 14 percent and NPV drops close to zero. That tells you the project is acceptable only if your true hurdle is below roughly 14 percent, so the real debate in the approval meeting is the rate and the year 2 to 3 cash flow assumptions, not the arithmetic.

#### Common mistakes

**Body:** The usual errors are using accounting profit instead of cash flow, ignoring the tax shield, using a single discount rate for projects of very different risk, and treating the capex request as the only cost when installation, downtime and training are real outflows. For projects with unequal lives, compare equivalent annual cost rather than raw NPV. Pair this with a simple payback check, since many boards still require one.

**Cta:** Capex requests are easier when the cash flow inputs come from real routing, scrap and downtime data in your ERP. We can help build that evidence pack. Ask for an expert review.

**Faq:**

#### What discount rate should I use for a capex project?

**Answer:** Start with your weighted average cost of capital and add a premium for project risk, often 2 to 5 points for new technology. Many companies publish a standard hurdle rate in their capex policy, so use that if one exists.

#### Why is NPV better than payback period?

**Answer:** Payback ignores the time value of money and everything after the payback date. NPV counts all cash flows and discounts them. Payback is still useful as a liquidity and risk screen, so use both.

#### How do I find the IRR from this tool?

**Answer:** Read the chart: the discount rate where the NPV line crosses zero is the IRR. You can also move the rate slider until NPV is near zero. The result is accurate to the slider step.

#### Should depreciation be included in the cash flows?

**Answer:** Depreciation is not a cash cost, so do not subtract it. Include only its tax shield, which is depreciation multiplied by your tax rate, as a cash inflow in the relevant years.

## Search terms

capex NPV calculator, capital budgeting NPV calculator, equipment purchase NPV, profitability index calculator, machine investment analysis, NPV calculator manufacturing, capital expenditure approval template

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