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! ๐ฅโฐ
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.
๐Takeaway: 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.
Dive deeper and gain exclusive access to premium files of Business Management HL. Subscribe now and get closer to that 45 ๐
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! ๐ฅโฐ
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.
๐Takeaway: 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.
Dive deeper and gain exclusive access to premium files of Business Management HL. Subscribe now and get closer to that 45 ๐