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Money Bag

Unit 3 - Finance & accounts - QB

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Chart Increasing

Unit 1 - Introduction To Business Management - QB

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Briefcase

Unit 2 - Human Resource Management - QB

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Direct Hit

Unit 4 - Marketing - QB

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Factory

Unit 5 - Operations management - QB

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Bar-Chart

Unit 6 - Assessment

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&#39;s money value.

Let&#39;s imagine you are the latest time-traveling superhero! 💥⏰

<ul>
	<li>
	Money value changes with time. $100 now isn&#39;t the same as $100 a few years from now (thanks to interest rates). So, if you could time-travel, you&#39;d see that your $100 today would grow to more in the future if invested.

	Example
	</li>
	<li>
	$100 today in a bank account at 10% interest becomes $110 in a year. Hence, $100 now = $110 in a year&#39;s future.

	<ul>
		<li>After another year, $110 becomes $121.</li>
		<li>After yet another year, it goes up to $133. Notice a trend? It&#39;s increasing because of the magic of compound interest!</li>
	</ul>
	</li>
</ul>

🎈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&#39;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&#39;s a good one!

💼 Investment: $500,000

Expected Cash Flows

<ul>
	<li>Year 1: $100,000</li>
	<li>Year 2: $200,000</li>
	<li>Year 3: $300,000</li>
	<li>Year 4: $250,000</li>
</ul>

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&#39; value decreases.

✅ Advantages

<ul>
	<li>Time Travel Bonus: It considers the time value of money.</li>
	<li>All-Inclusive: Considers all cash flows and when they happen.</li>
	<li>Flexible: Can adjust the discount rate if the economy goes all topsy-turvy.</li>
</ul>

❌ Disadvantages

<ul>
	<li>Brain Gym: A bit complicated compared to other methods.</li>
	<li>Same Outlay Rule: Only compares projects with the same initial cost.</li>
	<li>Prediction Game: The NPV result can swing with interest rate predictions.</li>
</ul>

Imagine choosing between opening a pizza shop 🍕 or an ice cream parlor 🍦. Both cost the same to start. Using NPV, you&#39;d not just consider the profits, but when you&#39;d get those profits and the current value of future money. If the pizza shop gives a positive NPV and the ice cream parlor doesn&rsquo;t, you&#39;d likely choose pizza! But remember, NPV isn&rsquo;t the only thing to consider. Always weigh all factors before making big decisions.

 
Remember, kiddos, NPV is your time-traveling financial friend that helps you make smarter business decisions! So next time you think of a business idea, don&#39;t forget to check its NPV! 💡🚀📈

Unit 3 - Finance & accounts - QB

Understanding Net Present Value (NPV): A Comprehensive Guide

Table of content

Definition 💡

Why do we need NPV? 💸

How do we convert future money to today's value? 🔍

Unlock the Full Content!

Unit 3 - Finance & accounts - QB

Understanding Net Present Value (NPV): A Comprehensive Guide

Table of content

Definition 💡

Why do we need NPV? 💸

How do we convert future money to today's value? 🔍

Unlock the Full Content!