Net Present Value - Part 2

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En provenance du cours de Emory University

Finance for Non-Financial Managers

40 notes

Emory University

Finance for Non-Financial Managers

40 notes

Finance is for “Non-financial Managers” who want to understand key financial principles and apply them in a real-world context. Over the course of the program window, you will work your way through a series of nine modules that move from understanding basic financial principles to applying financial analysis and ratios to drive decisions. In addition, each module is capped with an ending self-evaluation to ensure that you have absorbed the following key learning objectives: + Understand the language associated with finance + Know how and when to use financial terms and analysis techniques + Read and assess company performance using financial statements + Recognize the link between organizational strategy and financial objectives + Use "the numbers" to your best advantage to make more informed decisions

À partir de la leçon

Time Value of Money

This module will teach the time value of money.

Time Value of Money - Part 18:17

Time Value of Money - Part 29:22

Annuity - Part 14:39

Annuity - Part 25:56

Net Present Value - Part 15:42

Net Present Value - Part 23:46

Rencontrer les enseignants

Thomas Smith
Assistant Professor in the Practice of Finance
Goizueta Business School

So let's look at an example where we can use the NPV,

the net present value calculation to examine two alternative investments and

identify which of the investments is actually more advantageous.

Here I've got two sheets that are setup stacked with exact same information,

5% interest, 5% interest, negative $100,000 cash flow,

and five equal payments of $25,000.

Let's suppose for our first investment we spend $100,000 and

we're going to receive a $125,000 in return but

it's going to come more like this.

We get 20,000 here and then 25,000 there.

And then over here we're going to get 30,000.

All right, and so, we still have, this is still $125,000.

Yes it is, okay.

Now, down here, it's going to be slightly different.

Here, we're going to get our 30,000 up front here and our 20,000 back here.

All right.

So now even at 5% but look at these two scenarios.

First scenario we spend $100,000 and we get cash payments of 20,000,

25,000, 25,000, 25,000, and 30,000.

The second scenario is we spend $100,000 and we get cash payments of 30,000,

25,000, 25,000, 25,000, and 20,000.

Which one of these investments is better?

So without even doing the calculations,

I hope you're thinking the second calculation is better.

The second idea, the second scenario we're getting $30,000 quicker

than we were in the first scenario.

That's true.

Why do we care about that?

We want our money sooner than later.

Even if we have really low discount rates we still want

stuff sooner than later, so here's the mathematics.

The present value for the top, the present value of this net

income stream -100,000 and positive 20, 25,

25, 25, and 30 is equal to $7,393.

That is the net present value of scenario one is $7,393.

Scenario 2, my net present value,

it's -100,000 in an income steams of 30, 25, 25, 25, and 20.

My net present value is $9,081.

Obviously $9,081 is better than $7,393.

But the mathematics also shows why this is the case.

More of my money sooner brings my net present value higher.

So how do we use the NPV?

We can look at two or more income streams coming from different investments.

Look at the net present value.

So we are looking at the positive stream of revenue net of our cash outflow,

what it cost for us to get into this investment.

And then compare the value.

We want to choose the investment that has the higher NPV.

Good finance, good decisions.

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