Definitions

Net present value

The net present value or NPV of a cashflow is a financial metric that represents the present value of all present and future cash flows (inflows and outflows) for a project or investment.

It is used to determine the investment's profit or cost. A positive NPV means that the project is profitable. A negative NPV means that the the project is not profitable.

Net future value

The net future value or NFV of a cashflow is a financial metric that represents the future value of all future cash flows (inflows and outflows) for a project or investment.

It is calculated by adding up the future value of all cashflows on the end date. The NFV is equal to the NPV compounded forward for the entire duration of the project.

Internal rate of return

The internal rate of return or IRR of a cashflow is the nominal annual rate at which the net present value (NPV) of all cashflows from a project or investment equals zero.

To find this rate, InterestThing performs a number of iterations in order to find a solution in the range 0 to 100 %.

When performing these calculations, the rate in the Rate field is ignored, as will rate changes, if any.

When there are no sign changes, the IRR can not be calculated.
When there are multiple sign changes, the first solution it finds wil be displayed.

Equivalent annual cashflow

The equivalent annual cashflow or EAC, is a financial metric that converts a project's total cash flows over its lifespan into a single, constant annual amount.

It is used in capital budgeting to compare mutually exclusive projects with different lifespans, where the project with the higher EAC is preferred.

Example

On January 1st, 2024, you buy a $9,000 property. Monthly income for the first year is $100, and this will increase by 2 % each year. At the end of four years you expect to be able to sell the property for $10,000.

What is the net present value of this cashflow if interest is at 4 % compounded annually?

Set up the following cashflow or select the Cashflow metrics example in the Help > Examples menu.

Date	Type	Value	Occurs	#	Change	Step	Comment
1-1-2024	outflow	9,000	once				Purchase price
1-1-2024	inflow	100	monthly	48	2 %	12	Monthly return
1-7-2024	unknown	1	annually	4	no change		Equivalent annual rate
1-1-2028	inflow	10,000	once				Sell price

After opening or setting up the example, enter 0 in the x Value field and leave Auto update unchecked. This ensures that the Unknown event doesn't influence the metrics.

The net present value displayed in the status bar is 4,128.56. It represents the value on 1/1/2024, i.e. the first date in the cashflow.

The net future value displayed in the status bar is 4.829.83. It represents the value on 1/1/2029, i.e. the last date in the cashflow.

The internal rate of return displayed in the status bar is 15.3149 %. It represents the nominal annual rate at which both the NPV and the NFV of the cashflow become zero (or as close to zero as possible with the current rounding settings).

You can check this by entering 15.3149 into the Rate field. As you type, you'll see that the NPV and NFV values change, but that the IRR remains the same. Afterwards, change it back to 4, so that you can calculate the equivalent annual cashflow with this setting.

In order to be able to calculate the equivalent annual cashflow, we've added an Unknown event with factor 1 and start date 7/1/2024. It repeats annually for four years.

To calculate the EAC, check Auto update: the x Value field displays -1,115.28.

Please note that in this case, a negative value means that the actual EAC is $1,115.28. As the unknown calculates the value that makes the NPV zero by compensating for the other inflows and outflows, it produces a negative value.

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