Business Management HL
Business Management HL
6
Chapters
223
Notes
Unit 1 - Introduction To Business Management
Unit 1 - Introduction To Business Management
Unit 2 - Human Resource Management
Unit 2 - Human Resource Management
Unit 3 - Finance & accounts
Unit 3 - Finance & accounts
Unit 4 - Marketing
Unit 4 - Marketing
Unit 5 - Operations management
Unit 5 - Operations management
Unit 6 - Assessment
Unit 6 - Assessment
IB Resources
Unit 3 - Finance & accounts
Business Management HL
Business Management HL

Unit 3 - Finance & accounts

Understanding Net Present Value (NPV): A Comprehensive Guide

Word Count Emoji
634 words
Reading Time Emoji
4 mins read
Updated at Emoji
Last edited onย 14th Jun 2024

Table of content

Definition ๐Ÿ’ก

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.

Why do we need NPV? ๐Ÿ’ธ

Let's imagine you are the latest time-traveling superhero! ๐Ÿ’ฅโฐ

  • 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!

๐ŸŽˆTakeaway: Money paid in the future is worth less than the same amount paid today.

How do we convert future money to today's value? ๐Ÿ”

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.

Unlock the Full Content! File Is Locked Emoji

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

Nail IB's App Icon
IB Resources
Unit 3 - Finance & accounts
Business Management HL
Business Management HL

Unit 3 - Finance & accounts

Understanding Net Present Value (NPV): A Comprehensive Guide

Word Count Emoji
634 words
Reading Time Emoji
4 mins read
Updated at Emoji
Last edited onย 14th Jun 2024

Table of content

Definition ๐Ÿ’ก

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.

Why do we need NPV? ๐Ÿ’ธ

Let's imagine you are the latest time-traveling superhero! ๐Ÿ’ฅโฐ

  • 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!

๐ŸŽˆTakeaway: Money paid in the future is worth less than the same amount paid today.

How do we convert future money to today's value? ๐Ÿ”

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.

Unlock the Full Content! File Is Locked Emoji

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