Net Present Value - Part 1

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From the course by Emory University

Finance for Non-Financial Managers

37 оценки

Emory University

Finance for Non-Financial Managers

37 оценки

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

From the lesson

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

Meet the Instructors

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

Net present value is the same calculation as your present value,

but it's net of an original cost.

For example, let's suppose that a restaurant company pays $1.2 million for

a franchise that it hopes it can sell for $3 million in five years.

What is the present value of this transaction?

So there is a negative cost upfront right?

It's minus $1.2 million.

But the benefit is that they're going to receive $3 million in five years.

Suppose, for this example, the discount rate is 8%.

Then the present value, the net present value of this

particular transaction is $841,750.

Our NPV, we use that same present value calculation

by looking at the discounted future cash payments,

but it's net of your upfront costs.

All right,

we're going to go to the Excel where we're going to actually look at NPV right here.

Okay, this is NPV in Excel that goes along with NPV examples.

So here we have our NPV work book in our Excel.

And I'm going to set this up so that we can actually look at a transaction.

The transaction will be negative costs upfront and

then cash flows in the future and

then this workbook will help us determine whether or

not this investment is a good decision.

So we're going to set this thing up so that I'm talking at 5% interest.

Suppose that I have to pay $100,000

To purchase the rights to a sign.

So, I'd buy a sign on the side of the road, and I'd pay $100,000 for that sign.

Now, what's going to happen is, going forward,

I'm going to receive rent from that sign.

People are going to pay me to put their advertisements up on that sign.

Now, let's suppose that my sign has a 5-year useful life,

so, I pay $100,000 for this sign.

Now, let's suppose that my stream of rent is $20,000 every year.

So on its face, this looks like it's just a wash.

You pay a $100,000, you're going to get $100,000 back.

I get $20,000 each year right?

$20,000 use for the life of five years, it's $100,000.

I pay $100,000, I get 100,000, except,

the 100,000 that I'm receiving is not all at once.

It's spread out over five years.

So, at 5% interest rate, my discount factor for the first year is 95%.

That is, each $1 is really only worth $0.95.

Each $100 is really only worth $95.

So, $20,000 after year one is only worth $19,000 in change.

My present value factor, my discount factor for

year two is 91% so each dollar is only worth $0.91.

So my $20,000 I receive in year two is only worth $18,000 in change.

And then in year 3, it discounted at 86% so each dollar is only worth $0.86.

So now my $20,000 is only worth 17 and change and then year four, then year five.

So what happens is that the accumulation of the value of

these future Payments is not even worth 100,000.

As a matter of fact, the cumulative present value of

this scenario is negative $13,410.

So if I pay $100,000 today and receive these equal payments

of $20,000 over the next five years, this investment really has a negative value.

Supposed the signage, however, generates $25,000 a year instead of $20,000 a year.

So given these amounts, after year one, my $25,000 is worth $23,000.

After year two, it's worth $22,000.

After year three, it's worth $21,000, then $20,000 then $19,000.

The cumulative present value of this net income stream,

that is the positive stream net of my initial cash outlay,

is a positive $8,237.

How could I use a calculation like this?

I could look at two separate investment possibilities and

identify the investment possibility that gives me the higher net present value.

Let's set this up and let's look at this example briefly.

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