Net Present Value (NPV): The difference between the present values of future cash inflows and the original cost of investment. Think of it like a balance scale- On one side, you have your initial investment, and on the other, you have your future profits, but adjusted to today's money value.

Let's imagine you are the latest time-traveling superhero! 💥⏰

• Money value changes with time. $100 now isn't the same as $100 a few years from now (thanks to interest rates). So, if you could time-travel, you'd see that your $100 today would grow to more in the future if invested.

  Example

• $100 today in a bank account at 10% interest becomes $110 in a year. Hence, $100 now = $110 in a year's future.

  • After another year, $110 becomes $121.
  • After yet another year, it goes up to $133. Notice a trend? It's increasing because of the magic of compound interest!

🎈Takeaway: Money paid in the future is worth less than the same amount paid today.

Discounted Cash Flow Method: A special technique that uses interest rates to find out today's value of future money.

Example: If $100 in three years = $133, using this method (and a special table), we find out that the present value of that $100 is actually $75.13.

Suppose you have a business idea, and you need to find out if it's a good one!

💼 Investment: $500,000

Expected Cash Flows

• Year 1: $100,000
• Year 2: $200,000
• Year 3: $300,000
• Year 4: $250,000

Using a discount factor (which considers interest rates and time) of 8%, we calculate the NPV.

Result: NPV = $185,940 (positive value)

🥳 If NPV is positive like this, throw a party because it means your business idea is golden! If it was negative, maybe think twice!

🚧 Important: A higher discount rate means a lower NPV since the future cash inflows' value decreases.