what an outstanding explanation in simple terms. For someone starting afresh in FM, this is simply remarkable. The rationale quoted clarified all my questions. Extremely grateful to you for your explanation
It depends upon your situation. If you only wanted to estimate the impact of inflation on your future cash flows then you would use the inflation rate. However for capital budgeting projects the discount rate must account for the time value of money and what you give up as a result of not having the money now. Meaning if you had the money in your possession what would you likely earn on it? You can also add in the inflation rate to account for diminished purchasing power as well.
This video was awesome. I'm taking an online Healthcare Finance class. I was so lost in how to calculate NPV. You put it in terms that were so simple. This video help me to answer my discussion question for the week.
Excellent! For someone who has no background whatsoever and switching to Finance, this was very helpful. Thank you for the detailed and simple explanation.
I was struggling with this formula until watching this video. Simplified presentation. I have never been great at math but this was simple to learn due to the way it was presented.
It's also common for firms to use a cost of capital, which the return that would be needed on the project to make it worthwhile. Assuming NPV is greater than zero and the cost of capital is calculated accurately, this would be an acceptable project. Hope this helps Arijit.
Hi Shana, Most likely that project is related to some type of capital budgeting project so you would want to assess to total cash flow per year. For example, if cash inflows during year 1 represent $5,000, but a cash outflow of ($3,000) also is projected due to equipment maintenance you would discount $2,000 in total cash flow for year 1. Hope this clarifies for you . Good luck!
man!! best class ever!! damn,, i wish my classes were just as clear, lucid, and good as this one. thank you Sir!! ill come back with a lot of questions. that's it
Very straightforward and easy-to-understand video, well done. Question: are there any standards or methods on assessing the correct interest rate to use? I usually use the OECD rates for comparable businesses to assess our future investments but I'd like to know what other people are doing ... where would you check your rate? What's your advice? Thanks!
Thank you Ricca! It's common for companies to use a weighted average cost of capital (WACC), which is essentially the cost for the company to borrow money, as the discount rate when evaluating various expenditures. This allows the company to determine at minimum if the expenditure will at least cover borrowing costs and provides some basis of comparison between multiple projects. Great question. Hope this helps to clarify a bit.
***** I have to say, the reason is that unlike my professor, you are very easy to understand and generally made it look easy. You have gained a new subscriber and I hope more people will discover this your channel!
Hi, I found this video well explained and helpful! But I do want to know if there's a way to calculate this with the financial calculator. Do you have a video for that or could you tell me how to plug in the numbers in order to get the present value? Thanks! Would appreciate your help!
Very well explained. Thank you! I have a question. How can I do the NPV when for example I want to acquire a new appartment and rent it for tourists. I would need first the money from the bank who will charge me an interest per year. Does the cashflow is the rent that the tourists would pay me per year (lets say 100) minus the bank mortgage that I need to pay (lets say 40)? This would mean that the yearly cash flow is 60 per year and from this 60 per year I need to do the NPV?
Your explanations and solutions makes it easy for me to understand the concept of NPV. But i got a little confuse where cash inflows were consistent say in the first two years and from the 3 year onward, they were consistent. Does this mean i have to use both formulas for such a problem?
As long as you discount each years cash inflows separately (regardless if they're consistent) you will be fine. Most of the time where students go wrong is they add all cash inflows together and then discount them, which of course assumes that they will all be received at the same time. You can also use a financial calculator for this to help speed things up a bit.
This video is a explained better than my accounting lecture. But I'm having issues on how to discount those number to the 0.5 interest rate. I don't know how to calculate that for the calculator. Can some please help.
Great video. I need to decide weather to hold a rental property or sell (flip) it. Someone suggested I use NPV to evaluate my decision. After watching this video I understand why he suggested that.
I'm glad to heard this video helped you. If you're looking for additional resource sin the area of finance be sure to look into our "Capital Budgeting 101" playlist. Thanks for watching.
Its relllly helpful. And my question is for the reasons why suggest company use NPV, Can i say that NPV not only help manager make decison based on the value,but also can use 1.sensitivity analysis 2. present value index etc......?
Glad the video helped. Let me try to answer your question. NPV is one of several different methods of evaluating a project. Sensitivity analysis, which is primarily predictive in nature, along with the profitability index, which is very similar to NPV, can also aid in this evaluation. Other tools include the payback period and the internal rate of return to name a few. So to answer your question in a roundabout way, you can use each of them to conduct a more thorough analysis as each has its limitations. I hope that I answered your question to your expectations.
Xinyu Jiang No problem. I'm sorry to say that I don't answer questions via email at this time. I did at one time, but it became very time consuming and took away from my other responsibilities. Best of luck!
How do you calculate PVGO ( present value of growth opportunites) based on fluctuated investment in the first 2 years and a fixed cash flow after that?
10000000 thanks to u, u are making things very easy. i have a question , what kind of pen you use to write on board? can you use it to draw lines on excel or word?
You're welcome! I'm using a Wacom Bamboo Tablet for these along with Sketchbook Express. You have basically the same functionality with Word and Excel as you would an ordinary computer mouse so it doesn't add a whole lot of value in those applications.
That's not what I did. $2,8574.14 represents the present value of $3,000 discounted by 5% for one year. Therefore we couldn't divide $3,000 by $2,8574.14 (the PV) because we have yet to determine PV.
Hello, what would you do if the question was "Calculate the net present value of purchasing the new automated production system, rather than holding on to the existing production line." Thank you!!
+James Harrison Hi James! To answer this question you would first need to know the amount of investment needed to install the production line, the cost of operating the existing system (inclusive of the value of goods produced), and the cost of operating the proposed system (inclusive of the value of goods produced). Then you can subtract the difference for however many years you're given, discount those future cash flows, and see if they exceed your investment. Not sure if that's how your professor explained how to tackle the problem, but that's what I would do based on the information you've given. Hope that helps!
Hello Matt, I hope you are alright . I was wondering if the is a way to accurately calculate the amount of money that the business would generate each year rather than a feeling ? And also what did you mean " cash not from sales " ?
I'm doing great +Mohammed El-Berbawy and I hope you are as well. NPV is great for comparing the value of specific projects, but it isn't really meant to assess future cash flows for an entire business. For that I recommend generating a cash budget, which is essentially a forward looking (pro forma) statement of cash flows. Unfortunately I don't have a video on that topic as of yet. Although I'm not entirely positive I believe I was making reference to decreased operating costs and increased productivity associated with purchase the piece of equipment in the example. Even though the asset isn't necessarily revenue generating (i.e inventory) it does provide a benefit in terms of lower costs and higher productivity. Let me know the time in the video I mention this and I can follow up to confirm. Hope this helps. -Matt
I think I got what you meant by "not from sales ' watching the video again I think you meant that we use cash value after discounting direct sales expenses when trying to expect future cash flow. I'm looking forward for your video on generating a cash budget. And Thanks again for all your efforts.
but i have a question that , in lots of questions amount of cash inflow for each year is same, so they multiply that each year amount with a value which is a small value in points , above that value its written (percentage)% factor, instead of calculating each year PV, i try every method but i couldnt derive that vale, so i have to calculate each year pv separately.. please help
Excellent video. Thank you very much. Could you do a video on the NPV Profile and explain the conflict between NRV and IRR and why/how that occurs? Thank you once again
For capital budgeting projects firms typically use their cost of capital or weighted average cost of capital. And yes, you could use a different interest rate for each year if perhaps rates are fluctuating significantly. Good questions.
I have a hp 10b11 and can't figure out how to solve this problem. I have a mortgage note with a PV of $46,400, interest is 9%, 180 payments of $470.62. My question is how do I determine the note sale price if I want to sell it at a 15% yield? Thanks for any help anyone can give me.
Hello Matt, First of all great video and more in generally great videos I like ur style. Only one thing is not clear to me: NPV is used to assess a project discounting the future cash flows by the interest that can be earned with a risk free alternative (eg: a bank account or Government bond). Therefore if the NPV>0 we accept it because it earns more than risk free alternative. However with your example the present value of the project is $10804.45, which is ok. But if you chose the alternative of 5% interest it would have been $10000 * (1.05)^3= $11576.25. So why NPV is positive? why shall we take that project if the riskfree alternative has greater return? Thank you for your time Andrea
It looks like you're calculating the future value of investing $10,000 for three years at a 5 percent interest rate compounded annually. This is not the same thing as calculating the present value of an investment, since those cash flows aren't expected to be received at the same points in time. The other thing is that typically companies use what's referred to as a 'cost of capital' when discounting future cash flows, which is not the same thing as a risk-free interest rate. This is minimum percentage required on a capital budgeting project to make the project worthwhile. In this case we've determined at 5 percent is that figure, but this doesn't mean we could earn five percent on the $10,000 if we were to invest it. Hope this helps to clarify. Good question.
is it realistic to have an NPV of $7M for a project life of 10 years with an initial investment of $20M? Considering that we will breakeven on the 4th year. In other words, how can you determine the realistic expectation of an NPV
It all comes down to the anticipated return of the project. How much money would be saved/generated in each year that the capital budgeting project is implemented? That will help you determine whether the NPV is positive based on your $20 million up front investment.
I'm a complete maths non-starter so this was great thanks! But why is interest always written as decimal places and where does the "1" come from in the equation? 1 what? why is it added to interest?
No problem. I guess the simplest response would be you wouldn't get the correct answer without structuring the equation this way. Percentages are regularly converted into decimals to calculation purposes. For example, if I were to ask you what 50% (or half) or $100 is, you would know that the answer is $50. But this only works if you convert the percentage to a decimal. otherwise your response would be $5,000, which is obviously incorrect. The "1" in the equation is meant to help convert the future value into present value. It basically serves to make the number smaller. If you were to divide a number by a percentage you'll get a much larger number, which again is incorrect since PV should be less than FV. Hope this clarifies.
Sure. I use a Bamboo Tablet for the writing, Screenflow to capture the recording, Sketchbook for the canvas, and a usb microphone for the audio. You can find links to several of the items on the "resources" page at alanisbusinessacademy.com
what an outstanding explanation in simple terms. For someone starting afresh in FM, this is simply remarkable. The rationale quoted clarified all my questions. Extremely grateful to you for your explanation
It depends upon your situation. If you only wanted to estimate the impact of inflation on your future cash flows then you would use the inflation rate. However for capital budgeting projects the discount rate must account for the time value of money and what you give up as a result of not having the money now. Meaning if you had the money in your possession what would you likely earn on it? You can also add in the inflation rate to account for diminished purchasing power as well.
I am a public health major taking an economics class. Thanks a bunch! Great clarity.
I seriously enjoyed your presentation. My homework assignment is due in 2 days and I was lost. Your presentation was right on the spot. Thank you.
What my CPA level teacher couldn't teach in 1.5 hours was learned in 16 minutes. Amazing. Thank you. This helped me so much :)
This video was awesome. I'm taking an online Healthcare Finance class. I was so lost in how to calculate NPV. You put it in terms that were so simple. This video help me to answer my discussion question for the week.
Trish McElveen Very glad I could help. Good luck with your healthcare finance course.
Excellent! For someone who has no background whatsoever and switching to Finance, this was very helpful. Thank you for the detailed and simple explanation.
Glad to hear it was helpful. Best of luck to you.
I was struggling with this formula until watching this video. Simplified presentation. I have never been great at math but this was simple to learn due to the way it was presented.
Chris Hawkins Glad I could help you Chris! Good luck with the rest of your class.
It's also common for firms to use a cost of capital, which the return that would be needed on the project to make it worthwhile. Assuming NPV is greater than zero and the cost of capital is calculated accurately, this would be an acceptable project. Hope this helps Arijit.
Hi Shana,
Most likely that project is related to some type of capital budgeting project so you would want to assess to total cash flow per year. For example, if cash inflows during year 1 represent $5,000, but a cash outflow of ($3,000) also is projected due to equipment maintenance you would discount $2,000 in total cash flow for year 1. Hope this clarifies for you . Good luck!
You're welcome. Glad you found the video useful.
This really really helped me on my finance class. Excellent video Alanis,Excellent.
man!! best class ever!! damn,, i wish my classes were just as clear, lucid, and good as this one. thank you Sir!! ill come back with a lot of questions. that's it
Glad you liked the video! I do have several other videos on capital budgeting if you're interested. Hope to hear from you again soon.
Very straightforward and easy-to-understand video, well done. Question: are there any standards or methods on assessing the correct interest rate to use? I usually use the OECD rates for comparable businesses to assess our future investments but I'd like to know what other people are doing ... where would you check your rate? What's your advice? Thanks!
Thank you Ricca!
It's common for companies to use a weighted average cost of capital (WACC), which is essentially the cost for the company to borrow money, as the discount rate when evaluating various expenditures. This allows the company to determine at minimum if the expenditure will at least cover borrowing costs and provides some basis of comparison between multiple projects. Great question. Hope this helps to clarify a bit.
This is such a lifesaver. Thank you so much for making this clear. Your videos really helped me a lot improve my work in Business Development.
Glad I could help!
What my professor failed to teach in 9 months you have taught me in 16 minute's. You Sir deserve a cookie!
besi hoda That's too bad, but glad it finally made sense. I will most certainly take that cookie! Thanks.
*****
I have to say, the reason is that unlike my professor, you are very easy to understand and generally made it look easy. You have gained a new subscriber and I hope more people will discover this your channel!
besi hoda I really appreciate that Besi! Thanks for subscribing!
such a nice explanation...my exms are in a week..u made it easier ..Tysm for this video ..
Excellent instructor and excellent instructions rendered!
Thank you sir!
You are welcome.
Hi, I found this video well explained and helpful! But I do want to know if there's a way to calculate this with the financial calculator. Do you have a video for that or could you tell me how to plug in the numbers in order to get the present value? Thanks! Would appreciate your help!
Very well explained. Thank you! I have a question. How can I do the NPV when for example I want to acquire a new appartment and rent it for tourists. I would need first the money from the bank who will charge me an interest per year. Does the cashflow is the rent that the tourists would pay me per year (lets say 100) minus the bank mortgage that I need to pay (lets say 40)? This would mean that the yearly cash flow is 60 per year and from this 60 per year I need to do the NPV?
Thank you for this. You are saving me from so much stress. I am beyond grateful.
Very good, easily understandable explanation.
Glad it was helpful!
Yayy you helped me do my homework and I have a Finance Quiz tomorrow. Thanks man!
Rachael Hargrove Glad I could help. How did your finance quiz go?
Your explanations and solutions makes it easy for me to understand the concept of NPV. But i got a little confuse where cash inflows were consistent say in the first two years and from the 3 year onward, they were consistent. Does this mean i have to use both formulas for such a problem?
As long as you discount each years cash inflows separately (regardless if they're consistent) you will be fine. Most of the time where students go wrong is they add all cash inflows together and then discount them, which of course assumes that they will all be received at the same time. You can also use a financial calculator for this to help speed things up a bit.
Thanks for this video, it explains clearly what I am studying in economics.
Glad I could help! Thanks for watching.
Your lecture is very easy to understand. Thanks for it. Could you help with the formula when the cash flows are even?
Just learned everything I needed for my final tomorrow through your youtube channel -- THANK YOU
Alexandra Cano Glad I could help Alexandra! I'm sure you did great on your final. Thanks for watching!
Thanks so much for posting this. I do not have a finance/economic background and this helped a lot for my uni project!!
That's awesome Ram! I'm glad you got all of your questions answered. Best of luck to you!
This video is a explained better than my accounting lecture. But I'm having issues on how to discount those number to the 0.5 interest rate. I don't know how to calculate that for the calculator. Can some please help.
Glad you got it figured out Sarah.
your videos are so informative very easy to follow
How did you calculated (1+0,5) 3 ( in the third year.) the result is 2,5. I don't understand the 1,1576250 and the same for the first year.
Excellent quick tutorial. Thank you very much.
Thank you so much for this explanation. This was so much more understandable than my textbook.
Thanks Peter! New videos come out Monday's at 8:00 a.m. P.S.T. I have no plan on discontinuing that at this time.
Brilliant, a big dig out on my project management assignment for college. Thanks a million..
You're welcome Paul! Glad I could help.
This was really helpful. How would you calculate the NPV if interest rates are different for all the years?
thanks I have an exam tomorrow and this really helped :)
Emm Tee You're welcome. I hope your exam went well.
This video simplified everything for me. Thanks a lot
You make stuff simple and interesting... Thank -you
andre I'm glad you think so!
Great video. I need to decide weather to hold a rental property or sell (flip) it. Someone suggested I use NPV to evaluate my decision. After watching this video I understand why he suggested that.
NPV is a great tool for making those types of decisions. Best of luck to you!
thank you thank you thank you for sharing this lecture. read textbook and notes and I can't understand any until I saw your lecture. : )
I'm glad to heard this video helped you. If you're looking for additional resource sin the area of finance be sure to look into our "Capital Budgeting 101" playlist. Thanks for watching.
Its relllly helpful. And my question is for the reasons why suggest company use NPV, Can i say that NPV not only help manager make decison based on the value,but also can use 1.sensitivity analysis 2. present value index etc......?
Glad the video helped. Let me try to answer your question.
NPV is one of several different methods of evaluating a project. Sensitivity analysis, which is primarily predictive in nature, along with the profitability index, which is very similar to NPV, can also aid in this evaluation. Other tools include the payback period and the internal rate of return to name a few. So to answer your question in a roundabout way, you can use each of them to conduct a more thorough analysis as each has its limitations.
I hope that I answered your question to your expectations.
***** Thanks for answer. And i have few questions. My email is jxy27387079@gmail.com, could u contact me later plz?
Xinyu Jiang No problem. I'm sorry to say that I don't answer questions via email at this time. I did at one time, but it became very time consuming and took away from my other responsibilities. Best of luck!
***** OK thanks :)
OMG that was better and cleared than in grad class... THANK YOU!!!! : )
Glad I could help!
This was a LIFESAVER!!! I am so appreciative! THANK YOU!
Tracy Person You're welcome Tracy! Thanks for watching and please share with your friends.
I agree with the others...you have a very understandable way of teaching accounting!
You're too kind Brandy.
Apparently your videos are good enough our teacher linked to it to view, nice job ABA!
Andrew Sychra That's great! What institution are you enrolled?
For a friend of mine, Trident.edu Trident University.
Andrew Sychra Awesome! Best of luck with your studies.
Does NPV only take in account for cash inflow? I have a problem that includes a table that has inflows and outflows listed for four years.
What tools are u using in this tutorial to write things on digital board?
Hi, i have a question : If we have a Expected disposal/residual value, do we to add it to get the NPV?
Thanks this is very helpful. :) Do we need to add a minus symbol in front of number of period? I have seen it many NPV examples.
Very nicely explained. Would be nice if you can add few variety of examples on capital budgeting techniques.
how do you do it on the calculator? solves for PV for each cashflow each year?
Is the 3rd year discounting fig correct here in this vid?
It refreshed my mind with NPV. Thanks for sharing
If you had an initial investment as well as costs each year, then how would this factor into the NPV calculation?
Are you taking a course in finance? Learn how to calculate #NPV in this lesson: buff.ly/1qEs1H6 #AlanisBusiness #finance
Thank youfor the video. Hope you would come up with more financial management lectures soon.
How do you calculate PVGO ( present value of growth opportunites) based on fluctuated investment in the first 2 years and a fixed cash flow after that?
10000000 thanks to u, u are making things very easy. i have a question , what kind of pen you use to write on board? can you use it to draw lines on excel or word?
You're welcome! I'm using a Wacom Bamboo Tablet for these along with Sketchbook Express. You have basically the same functionality with Word and Excel as you would an ordinary computer mouse so it doesn't add a whole lot of value in those applications.
is the rate of calculation of the present value determined by the inflation rate?
Much clearer explanation than similar Khan Academy version
Thank you Philippe! That's quite the compliment.
***** why don't you divide the 3000 by 2,8574.14 for the first year like you did for the second and third year
That's not what I did. $2,8574.14 represents the present value of $3,000 discounted by 5% for one year. Therefore we couldn't divide $3,000 by $2,8574.14 (the PV) because we have yet to determine PV.
ok thanks
where can i get the calculator you mentioned in the video ?
Hello, my question has cost of capital of 12% and marginal tax of 30%. In this case what value should i use for interest value in the formula for PV
Thank you, very clear and easy!
That's great to hear. Thanks for taking the time to comment.
Very nicely explained
this was helpful thank you very much
Hey thanks! You’re very welcome.
as I listen this video, I totally understand so easy
황인규 That' the goal! Glad it worked out.
Hello, what would you do if the question was "Calculate the net present value of purchasing the new automated production system, rather than holding on to the existing production line." Thank you!!
+James Harrison Hi James! To answer this question you would first need to know the amount of investment needed to install the production line, the cost of operating the existing system (inclusive of the value of goods produced), and the cost of operating the proposed system (inclusive of the value of goods produced). Then you can subtract the difference for however many years you're given, discount those future cash flows, and see if they exceed your investment. Not sure if that's how your professor explained how to tackle the problem, but that's what I would do based on the information you've given. Hope that helps!
***** Great! Thank you for taking your time to explain it!
Hello Matt, I hope you are alright .
I was wondering if the is a way to accurately calculate the amount of money that the business would generate each year rather than a feeling ? And also what did you mean " cash not from sales " ?
I'm doing great +Mohammed El-Berbawy and I hope you are as well.
NPV is great for comparing the value of specific projects, but it isn't really meant to assess future cash flows for an entire business. For that I recommend generating a cash budget, which is essentially a forward looking (pro forma) statement of cash flows. Unfortunately I don't have a video on that topic as of yet.
Although I'm not entirely positive I believe I was making reference to decreased operating costs and increased productivity associated with purchase the piece of equipment in the example. Even though the asset isn't necessarily revenue generating (i.e inventory) it does provide a benefit in terms of lower costs and higher productivity. Let me know the time in the video I mention this and I can follow up to confirm.
Hope this helps.
-Matt
I think I got what you meant by "not from sales ' watching the video again I think you meant that we use cash value after discounting direct sales expenses when trying to expect future cash flow.
I'm looking forward for your video on generating a cash budget. And Thanks again for all your efforts.
That would certainly be true so I think that you're correct. Hopefully I can put together a video on the cash budget over summer.
but i have a question that , in lots of questions amount of cash inflow for each year is same, so they multiply that each year amount with a value which is a small value in points , above that value its written (percentage)% factor, instead of calculating each year PV, i try every method but i couldnt derive that vale, so i have to calculate each year pv separately.. please help
Excellent video. Thank you very much. Could you do a video on the NPV Profile and explain the conflict between NRV and IRR and why/how that occurs? Thank you once again
Maybe not then
Thank you very much excellent explanation!
You're welcome Rajan! Glad I could help.
Thank you Matt. It was awesome.
How to choose the discount rate?? Is just by randomly?
By the way, is it possible to use the different interest rate for each particular year?
For capital budgeting projects firms typically use their cost of capital or weighted average cost of capital. And yes, you could use a different interest rate for each year if perhaps rates are fluctuating significantly. Good questions.
Great job!!! Do Think you can do a more complex NPV with working capital and tax shield and CM?
Thanks! I do want to dive further into NPV in the future once I have some other areas established. Thanks for the recommendation.
Saved my day! Thanks a lot! Well explained!
Thanks! Glad I could help you.
Thank you for this awesome break down!
I have a hp 10b11 and can't figure out how to solve this problem. I have a mortgage note with a PV of $46,400, interest is 9%, 180 payments of $470.62. My question is how do I determine the note sale price if I want to sell it at a 15% yield? Thanks for any help anyone can give me.
Aaarrrggghhh The way you explain it makes way more sense. thanks very much. I get it now!!!
Hello Matt,
First of all great video and more in generally great videos I like ur style. Only one thing is not clear to me: NPV is used to assess a project discounting the future cash flows by the interest that can be earned with a risk free alternative (eg: a bank account or Government bond). Therefore if the NPV>0 we accept it because it earns more than risk free alternative. However with your example the present value of the project is $10804.45, which is ok. But if you chose the alternative of 5% interest it would have been $10000 * (1.05)^3= $11576.25.
So why NPV is positive? why shall we take that project if the riskfree alternative has greater return?
Thank you for your time
Andrea
It looks like you're calculating the future value of investing $10,000 for three years at a 5 percent interest rate compounded annually. This is not the same thing as calculating the present value of an investment, since those cash flows aren't expected to be received at the same points in time. The other thing is that typically companies use what's referred to as a 'cost of capital' when discounting future cash flows, which is not the same thing as a risk-free interest rate. This is minimum percentage required on a capital budgeting project to make the project worthwhile. In this case we've determined at 5 percent is that figure, but this doesn't mean we could earn five percent on the $10,000 if we were to invest it.
Hope this helps to clarify. Good question.
what about when you factor in inflation? Kindly give an example?
You're welcome Samuel! Be sure to checkout my new video on calculating IRR if you're interested.
it was very important material difficult to own it & i want to appriciated for that.....Thank you
Thanks for your help buddy!
I am confused on how you came up with 11025 by dividing 4000 and (1 + .05)2? I am not getting that number when I divide those two.
is it realistic to have an NPV of $7M for a project life of 10 years with an initial investment of $20M? Considering that we will breakeven on the 4th year.
In other words, how can you determine the realistic expectation of an NPV
It all comes down to the anticipated return of the project. How much money would be saved/generated in each year that the capital budgeting project is implemented? That will help you determine whether the NPV is positive based on your $20 million up front investment.
I'm a complete maths non-starter so this was great thanks! But why is interest always written as decimal places and where does the "1" come from in the equation? 1 what? why is it added to interest?
No problem. I guess the simplest response would be you wouldn't get the correct answer without structuring the equation this way. Percentages are regularly converted into decimals to calculation purposes. For example, if I were to ask you what 50% (or half) or $100 is, you would know that the answer is $50. But this only works if you convert the percentage to a decimal. otherwise your response would be $5,000, which is obviously incorrect. The "1" in the equation is meant to help convert the future value into present value. It basically serves to make the number smaller. If you were to divide a number by a percentage you'll get a much larger number, which again is incorrect since PV should be less than FV.
Hope this clarifies.
Thanks for sharing, I learned a lot from your video.
Well thank you! Glad I could help.
great.. thank for the class
Manju Seneviratne You're welcome! Thanks for watching.
SIR!
please tell taht
WHY we use interest rate in this formula.what is the purpose of interest.?
Thanks for help on a difficult concept for me!
Can you tell me the tools you use to make these videos, please?
Sure. I use a Bamboo Tablet for the writing, Screenflow to capture the recording, Sketchbook for the canvas, and a usb microphone for the audio. You can find links to several of the items on the "resources" page at alanisbusinessacademy.com
how did you get 1.1025 on the 2nd year?
Fucking hell finally someone explaining well
Thank you so much. It was very helpful.
Glad to hear. You're very welcome.
i dont understand year 2 equation. 4000 ÷ 1.05 "to the second power".. how to i equate that? is it 1.10 i need to divide by or am i missing something?