6
Chapters
175
Notes
Unit 1 - Introduction To Business Management
Unit 2 - Human Resource Management
Unit 3 - Finance & accounts
Unit 4 - Marketing
Unit 5 - Operations management
Unit 6 - Assessment

# Understanding Net Present Value (NPV): A Comprehensive Guide

634 words
Last edited onย 14th Jun 2024

## Definition ๐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? ๐ธ

Let's imagine you are the latest time-traveling superhero! ๐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!

๐Takeaway: Money paid in the future is worth less than the same amount paid today.

## How do we convert future money to today's value? ๐

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.

# Understanding Net Present Value (NPV): A Comprehensive Guide

634 words
Last edited onย 14th Jun 2024

## Definition ๐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? ๐ธ

Let's imagine you are the latest time-traveling superhero! ๐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!

๐Takeaway: Money paid in the future is worth less than the same amount paid today.

## How do we convert future money to today's value? ๐

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.