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Net Present Value Calculator

Our net present value calculator will tell you the current value of future cash flow. This is a useful tool to analyze the cash flow only. It does not take into account good will, inventory, content, software or any other value the website or domain might have. That said, understanding the value of the cash flow is imperative. Please watch the video tutorial first and contact us if you can think of ways to improve this.

Step 1 - Project Details:

Each project requires a name to make further use of the calculator more convenient. Each new name will be saved as a Project which you can return to at a later time.

Step 2 - Initial Investment:

Here we factor in the initial purchase price for the website you are considering investing in, as well as taking into account the discount rate, risk adjustment, and risk adjusted discount rate.

Step 3 - Cash Flows:

Here we are taking into account the annual revenue and annual expenses of the website. We have defaulted to three years. You can add or remove years as you see fit.

Step 4 - Final Step:

To calculate the final information we need to know if the intent is to sell the property, or maintain ownership.

Real Time Summary
 

More About Purchase Price

This is the most straight forward of the fields on the form. Just enter what you want to pay for the site or what you think you can sell it for.

More About Discount Rate

This is your cost of capital. If you are borrowing money, it's the interest rate you will be paying. If you are using cash in the bank, it's the minimum return that you would expect on any other investment. In other words, if you think you could earn 10% playing the stock market and you will be using your own cash, just enter 10%.


The reason it's called a discount rate, rather than an interest rate, is because it will discount the future cash flows to help you determine the eventual net present value. As an example, $10,000 earned next year at a 10% discount rate is only $9000 today. $10,000 earned 2 years from now is worth only $8100 today because it’s discounted twice at 10%. That's the entire point of this exercise. What is the asset worth in today's dollars?


For further reading, check out Wikipedia's article on discounted cash flow.

More About Risk Adjustment

We feel that this is the most important element to focus on. In its most basic sense, the risk factor just adds onto the discount rate. So, if you enter a 20% risk factor and you have the discount rate set at 10%, you have a combined discounted cash flow of 30%.


Most financial analysis formulas don't include a risk factor but we feel it's imperative here. There are inherent risks in purchasing a website. If you can accurately identify those risks and the percentage chance that everything could go horribly wrong, you'll have a competitive advantage. To put another way, he who most accurately identifies the risk, wins.


One of the most common questions we get asked is "what happens if the site loses all of its Google rankings"? Well, if you can calculate the chance of that happening, you can just factor it in. Different search terms are more competitive than others. If the site you are looking at is about insurance, it should have a higher number in the risk factor than one about dalmatian puppies because there are so many more sites going after insurance terms.


How old is the site? How many terms does the site rank for? How many inbound links does the site currently have? These are all questions you have to ask yourself when determining the risk. For us, we see sites that are low risk where we would recommend a 10% risk factor and we see sites that are high risk and we’d want you to put a number as high as 50%.

More About Risk Adjusted Discount Rate

Simply put, the combined Discount and Risk factors.

More About Annual Revenue

Annual Revenue is pretty straight forward but should be carefully considered. Just enter what you anticipate the revenue to be each year that you will own the site.


When we use this tool ourselves, we'll first want to see what the NPV will look like just entering in the site's current revenue and expenses every year. Then after we've digested the numbers, we'll start playing with them. Before we make a decision on whether it's a good deal or not, we'll often fill out this form and change the revenue and expense numbers dozens of times, if not more.

More About Annual Expenses

Annual Expenses follows the same rules as annual revenue. Try it with different numbers. See what the NPV comes out at by increasing the expenses to improve the site or double down on seo services. Take a look at what would happen if you lowered expenses. Try as many different combinations as you can to help you make the decision and plan accordingly.

More About Exit/Sale Price

Sale Price. As any savvy investor will tell you, never start a business or buy one without an exit strategy. You should know in advance what you think you will eventually liquidate for and when you expect that to happen.

If you are buying the site purely for cash flow and you anticipate the cash flow remaining constant then you might want to enter the same amount you are paying for the site. However, that's rarely how things play out. The truth is whatever number you put there will be discounted by the discount rate and the risk factor mentioned above. So the same dollar figure in the future is not the same amount today. You will need to increase the value to get he same amount back.

Most buyers will adjust the revenue and expenses in future years in order to grow the site and then apply a simple multiple of revenue in this section. That works just fine for the exercise. It’s alright to price a site on a multiple. Just keep in mind that when you are buying a site, we are looking for the net present value of that future sales price.

If you have gotten this far and you have completed the form, and you see a positive number, you are creating wealth and it can be argued that you should do the deal. If you are seeing a negative number, you should not do the deal as you would be destroying wealth.

The NPV is what the deal is worth with all factors considered. The number is the number. If the NPV is $5000 than you are creating $5000 in wealth to do the deal. It is amazing how easy it makes the decision process.

The only reason to not do a deal with a positive NPV is lack of capital. Assuming that it does not cost you a bigger NPV deal, you are just looking for a positive number. If you do find yourself in the lucky position of comparing two positive NPV deals, you should use the internal rate of return to help you make the decision. You really need both numbers to be satisfying and if the NPVs are equal you should go with the deal that has the higher IRR and vice-versa.

We hope that by this point you understand that the real challenge is in correctly identifying the risk factor, future cash flows (revenue) and future expenses. If you focus your efforts on those items, then you can just change the price paid on the site to modify what the NPV output will be and determine what you should be offering for the site.

Because we can not say it enough, we will break it down for you.

  • Net = the absolute dollar figure
  • Present = in today's terms
  • Value = that the deal is worth to you

We have all heard people talk about a deal's return on investment as a percentage number but ROI is an amateurish term. No corporate executive or MBA would ever consider such a metric. What matters is the NPV and the "internal" rate of return (IRR).

The IRR takes into account the present value of future cash flows. It looks like an RIO number but it is going to be a little smaller because the future has been discounted.

You should be looking for an IRR that is greater than other opportunities and greater than the cost of capital.

If a deal is showing you an IRR of 20% and your discount rate is 10% and you have no other opportunities that are going to eat up all of your cash, it is a great deal.

Similarly, if your IRR is showing as 8% and you can only borrow money at 15% you would get yourself in a heap of trouble by doing the transaction.

Project Name

Here is where you enter a name for your project. You will be able to save this and access it at another time.

Close it
More About Purchase Price

This is the most straight forward of the fields on the form. Just enter what you want to pay for the site or what you think you can sell it for.

Close it
More About Discount Rate

This is your cost of capital. If you are borrowing money, it's the interest rate you will be paying. If you are using cash in the bank, it's the minimum return that you would expect on any other investment. In other words, if you think you could earn 10% playing the stock market and you will be using your own cash, just enter 10%.


The reason it's called a discount rate, rather than an interest rate, is because it will discount the future cash flows to help you determine the eventual net present value. As an example, $10,000 earned next year at a 10% discount rate is only $9000 today. $10,000 earned 2 years from now is worth only $8100 today because it’s discounted twice at 10%. That's the entire point of this exercise. What is the asset worth in today's dollars?


For further reading, check out Wikipedia's article on discounted cash flow.

Close it
More About Risk Adjustment

We feel that this is the most important element to focus on. In its most basic sense, the risk factor just adds onto the discount rate. So, if you enter a 20% risk factor and you have the discount rate set at 10%, you have a combined discounted cash flow of 30%.


Most financial analysis formulas don't include a risk factor but we feel it's imperative here. There are inherent risks in purchasing a website. If you can accurately identify those risks and the percentage chance that everything could go horribly wrong, you'll have a competitive advantage. To put another way, he who most accurately identifies the risk, wins.


One of the most common questions we get asked is "what happens if the site loses all of its Google rankings"? Well, if you can calculate the chance of that happening, you can just factor it in. Different search terms are more competitive than others. If the site you are looking at is about insurance, it should have a higher number in the risk factor than one about dalmatian puppies because there are so many more sites going after insurance terms.


How old is the site? How many terms does the site rank for? How many inbound links does the site currently have? These are all questions you have to ask yourself when determining the risk. For us, we see sites that are low risk where we would recommend a 10% risk factor and we see sites that are high risk and we’d want you to put a number as high as 50%.

Close it
More About Annual Revenue

Annual Revenue is pretty straight forward but should be carefully considered. Just enter what you anticipate the revenue to be each year that you will own the site.


When we use this tool ourselves, we'll first want to see what the NPV will look like just entering in the site's current revenue and expenses every year. Then after we've digested the numbers, we'll start playing with them. Before we make a decision on whether it's a good deal or not, we'll often fill out this form and change the revenue and expense numbers dozens of times, if not more.


More About Annual Expenses

Annual Expenses follows the same rules as annual revenue. Try it with different numbers. See what the NPV comes out at by increasing the expenses to improve the site or double down on seo services. Take a look at what would happen if you lowered expenses. Try as many different combinations as you can to help you make the decision and plan accordingly.

Close it
More About Exit/Sale Price

Sale Price. As any savvy investor will tell you, never start a business or buy one without an exit strategy. You should know in advance what you think you will eventually liquidate for and when you expect that to happen.


If you are buying the site purely for cash flow and you anticipate the cash flow remaining constant then you might want to enter the same amount you are paying for the site. However, that's rarely how things play out. The truth is whatever number you put there will be discounted by the discount rate and the risk factor mentioned above. So the same dollar figure in the future is not the same amount today. You will need to increase the value to get he same amount back.


Most buyers will adjust the revenue and expenses in future years in order to grow the site and then apply a simple multiple of revenue in this section. That works just fine for the exercise. It’s alright to price a site on a multiple. Just keep in mind that when you are buying a site, we are looking for the net present value of that future sales price.

Close it
More About Perpetuity Value

Any Net Present Value calculator requires what they call a "Terminal Value." If you aren't going to be selling the asset, mathematically the right thing to do is to enter a perpetuity value. The perpetuity value is the value of cash flow that never ends. Don't worry though. We understand that cash flow far out in the future is really risky. That's why the perpetuity value gets discounted by the discount rate and risk factor.


For example, if someone told you they would give you $1 per year for the rest of your life, what would you pay for that? Well, at a 10% discount rate the math would be $1/.10 or $10. The contract would be worth $10. If you thought there was a 20% chance that you would never get that payment, you would add 20 to the discount rate and divide the cash flow by 30 or $1/.30 which comes to $3.33. That's all $1 per year for life would be worth if the future cash flow were discounted heavily.

Close it
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