Net Present Value explained in a clear and simple way, in just a few minutes! Two steps: first understanding the idea of present value and future value, and then Net Present Value. Present Value and Future Value are closely related concepts. An example of Future Value is: How much money
will I have one year from now if I invest $100 at an expected 20% annual return? $100 multiplied by 1.2 is $120. An example of Present Value is: How much money do I invest today to achieve $120 one year from now at an expected 20% annual return? $120 divided by 1.2 is $100. So to get to the future
value, you move from left to right: take a present value, and multiply it by 1 plus the rate of return. To get to the present value, you go from right to left: take a future value, and divide it by 1 plus the rate of return. You can do this for multiple years as well. How much money will I have two
years from now if I invest $100 at an expected 20% annual return? $100 multiplied by 1.2 is $120. This $120 in turn multiplied by 1.2 is $144. How much money do I invest today to achieve $144 two years from now at an expected 20% annual return? $144 divided by 1.2 is $120. Then divide the $120 once
again by 1.2 to get to $100 today. The formula for future value is $100 times 1.2 to the power 2, equals $144. In other words, present value times 1 plus the rate of return to the power of the number of years, equals future value. The formula for present value is $144 divided by 1.2 to the power 2,
equals $100. In other words, future value divided by 1 plus the rate of rate of return (to the power of the number of years), equals present value. Let’s perform a Net Present Value calculation step-by-step. What is the present value (PV) of all the cash inflows and cash outflows of the following
project? The project is expected to provide four years’ worth of benefits of nominally $400 per year, and an investment today of $1000 to launch the project. What is the present value of a $400 benefit that we expect one year from now? Take the nominal amount of $400 and divide it by 1 + the
weighted average cost of Capital. Weighted average cost of Capital (or WACC) is a calculation of a firm’s cost of Capital in which each category of Capital is proportionately weighted. We take a fairly high WACC of 20% in
this calculation. 1 + 20% equals 1.2. $400 divided by 1.2 equals $333. The present value of a nominal amount of $400 one year from now is $333 as today’s equivalent. What is the present value of a $400 benefit that we expect two years from now? To calculate that present value, we need to take the
nominal amount of $400 and divide it by 1 + 20%, to the power 2 (as we need to take two steps: from year 2 to year 1, from year 1 to today). This is the same as saying $400 divided by 1.2 * 1.2, or $400 divided by 1.44, which is $278. Next we calculate the present value of the $400 benefit that we
expect three years from now, and the present value of the $400 benefit that we expect four years from now. We have now translated all Cash Flows into today’s equivalent. To get to NPV, you now simply sum the amounts: $333 + $278 + $231 + $193 minus $1000 investment today. The Net
Present Value is $35. The word “Net” in the term “Net Present Value” means deducting the investment amount from the present values of the future Cash Flows. As the net present value of this project is positive, it is worth pursuing. Accept the project proposal, as it
creates value for the company. If the net present value of the project would have been negative, it would not be worth pursuing. Reject the project proposal, as it does not create value for the company. The main idea of Net Present Value is very simple: time is money! The net present value method
takes the time value of money into account, by translating all future Cash Flows into today’s money, and then adding up today’s investment and the present values of all future Cash Flows. Want to learn more about business and href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance
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Enjoyed this video? Then please subscribe to the channel, and let's review what WACC means and how WACC is calculated: https://www.youtube.com/watch?v=1O-DbtVueMw
Ive been studying economics, business and finance for 5 years since i was in high school till now and ive had many teachers teach me this. But the way i understood it now more then ever in 5 minutes is crazy
I don't understand why we use discount rate ? What are we discounting ? And how can one arrive at a discount rate ? How do we calculate it to find it ( discount rate ) ourselves ?
Not in this example you did but we usually take it into account right ? Present Value ( benefits ) – Present Value ( cost ) = NPV of the project
But we use in excel sheet formula discount rate then select each year's value.
Truly truly truly a story teller indeed !
Npv is the difference of cash outflow today for starting up the project and the present value of all the cash inflow that project generate💚
Npv= investment – present value of cash inflow.
This is the most simplified version my brain can understand. Thank you!!!! I came up the right answer using your version!!!
It is great explanation. By the way if you made a video of how to calculate mandelbrot fractals it would really be incredible
where from the 1.2
Why do we take wacc as discounting rate?
damn thanks man, made things so simple
Why do you use a 20% discount rate while calculating npv? Please reply I'm stuck with that question.
Wow, i happy to have watched this video. No teacher and textbook has explained it better than you Sir! Explained in a nice and simple way. I will never forget this again. Menzi from South Africa.
Thank you for this
can any one please explain hoe NVP is 35$
Thank you thank you. Easy to understand
You forgot to explain in the first place how you arrived at 1.2 – I don’t know how so nothing made sense to me 🤷♂️ I’m stupid but so is anyone just starting their journey in finance
✨❤✨
Simple and comprehensive. Great content!
Thank you ❤
I am now more confused. I don't understand the concept. I see numbers that yield a return but if you follow the graph far enough they do not. Help.
After watching two videos the whole night, the following morning I decided to revisit this NPV & I came across your video, OMG easiest explanation ever!!!!🥰
Thank You!
@2:58 How do we find the weighted average cost of capital? ie how did he get the 120%?
This is why teachers over the world are in such a noble profession. When you take any concept and explain it in such detail but with such ease of understanding – it is such a beautiful thing.
This five minute explanatiion > any other 5 hour explanation on TVM and NPV topic.
A firm needs component in an assembly operation. If it wants to do the manufacturing itself, it would need to buy a machine for Rs. 400,000 which will last for 4years with no salvage value. Manufacturing costs in each of the 4 years would be Rs. 600,000, Rs. 700,000, Rs. 800,000, and Rs. 1 million respectively. If the firm had to buy the components from a supplier, the cost would be Rs. 0.9 million, Rs. 1 million, Rs. 1.1 million and Rs. 1.4 million respectively in each of the four years. However, the machine would occupy floor space which would have been used for another machine. This latter machine would be hired at no cost to manufacture an item, the sale of which would produce net cashflows in each of the four years of Rs. 0.2 million. It is impossible to find room for both the machines and there are no other external effects. The cost of capital is 10% and the present value factor for each of the four years is 0.909, 0.826, 0.751 and 0.683 respectively.
Should the firm make the components or buy from outside?
What will be the solution?
🤯 you've explained this more clearly in 5minutes than a teacher in a class room and hours spent on subsequent revision sessions. Thank you
Great video. Thank you for the simple explanation
After watching this video I understood PV, FV and NPV perfectly. This really helps ❤
Thanks, very useful and clear explanation! 🙂
legend, thanks !!
Thanks for sharing
you saved me
So the difference between NPV AND PV is that NPV is basically the net ammount of costs and return profit from mutliple years and PV is just the ammount invested at the start? Also I dont really understand your slogan saying time is money. I get it obviously but not how it applies to NPV. Were calculating the costs so we can see if we make profit by investing into this company. But what does time have to do with it? It's just about the cost and profit ammounts no?
Best and simplest explanation by far
Very Well Explained, Thank you Sir
Where’s you get 1.2 from ???????)
Brilliant easy to understand.
easy to understand, thank you
why are they multiplying it by 1.2 at 0:34 ? Xxx
Thank you sir! I struggle a lot to get how this magic works, and you make it much easier
Please, a little dump question, is the 1.2 for the first sample questions a constant number?
I legit almost cried when I did the calc on a project and came up with the right answer after watching this! THANK YOU!!!!
Excellent example for those who haven't get financial math training.
Liked n subscribed, wherever u go, we shall follow 🫡
How do u get the 1.2?
Is the WACC the discounted factor?
This is the only clear explanation of PV on the internet! Thank you
Fantastic video