Teaching Net Present Value (NPV) And Future Value (FV) - BUS 401 - Class Notes | Finance

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1Teaching Net Present Value (NPV) and Future Value (FV)BUS 401NameDateInstructor

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Net Present Value (NPV)➢NPV is used to compare the value of money thatis to be received in the future with the presentvalue of the same amount of money (Hickman, K.and Byrd, J. 2013)➢The value of money changes with time. NPV iscalculated while making investment decision inorder to factor in changes in the value of moneyin the decision making process.➢A given amount of money will have less worth inthe 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 futurethan in the present because:1. People would rather consume money in thepresent than in the future (Hickman, K. andByrd,2013)2. Monetary inflation means that the same amountof money would purchase few items in the future(Fabozzi& Markowitz, 2002).3. Uncertainty of future events exposes theinvestment 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 thecash outflows from the cash inflows.❑Determine the discounting rate. The discounting raterepresent the cost at which present benefits are traded forfuture benefits (Dayananda, 2002).❑The discounting also represent the opportunity cost asfactors the gains that the investor would have made if hewould have undertaken a different project (Chass, 2005).4

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