Teaching Net Present Value (NPV) And Future Value (FV) - BUS 401

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1 Teaching Net Present Value (NPV) and Future Value (FV) BUS 401 Name Date Instructor
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Net Present Value (NPV) ➢ NPV is used to compare the value of money that is to be received in the future with the present value of the same amount of money (Hickman, K. and Byrd, J. 2013) ➢ The value of money changes with time. NPV is calculated while making investment decision in order to factor in changes in the value of money in the decision making process. ➢ A given amount of money will have less worth in the future than in the present in any situation. 2
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Reasons for Time Value of Money ➢ A dollar will always have low value in the future than in the present because: 1. People would rather consume money in the present than in the future (Hickman, K. and Byrd,2013) 2. Monetary inflation means that the same amount of money would purchase few items in the future ( Fabozzi & Markowitz, 2002). 3. Uncertainty of future events exposes the investment to significant risks. 3
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Calculating the NPV ➢ Obtain the cash outflows from the investments. ❑ Get the net cash flow for each period by subtracting the cash outflows from the cash inflows. ❑ Determine the discounting rate. The discounting rate represent the cost at which present benefits are traded for future benefits (Dayananda, 2002). ❑ The discounting also represent the opportunity cost as factors the gains that the investor would have made if he would have undertaken a different project (Chass, 2005). 4

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