how do you work out net present value?

Question

with out using a complex formula. to a-level standard

Answer 1

Net Present Value (NPV) means the value of something now that you will receive in the future.

As any kid knows - sweets NOW are worth A LOT MORE than sweets tomorrow - but sweets tomorrow are still worth more than sweets next week ...

So NPV is the money value of something 'today'.


Plainly is it better to have £105 today rather than £105 at the end of the year .. but how much 'more' ?

To find out we have to calculate what £105 (at the end of the year) is worth today. i.e. it's NPV.

The answer is "however much you would need 'now' in order to get £105 later".

To do this we have to know what the Interest rate is. Lets assume Interest Rate is 5% ... well if you had £100 now and put it into a Building Society at 5% interest, your would end up with £105 at the end of the year !

So the NPV of £105 for 1 year is £100.

Say you only get the £105 in 2 years ? Well same approach applies .. only now NPV is (approx) £95 ... why ? well after 1 year at 5%, £95 becomes (approx) £100 - and after the second year, the £100 becomes £105 ... so NPV of £105 in 2 years is (approx) £95 today.

Same applies for however many years you like ...

NPV can be calculated by Excel (formula) - you have to enter the final amount (eg 105), the Interest rate (eg 5%) & the no. of years (eg 2).

Answer 2

NPV = Present value of cash inflows - Present value of cash outflows (or minus initial investment in many cases)

Answer 3

internet e book fee is the fee of an asset minus amassed depreciation. internet contemporary fee contains time fee of money, money flows. they are extremely nowhere close to the comparable component.