Teaching Net Present Value (NPV) And Future Value (FV) - BUS 401

Name: Teaching Net Present Value (NPV) And Future Value (FV) - BUS 401
Brand: Ashford University
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Author: David Rodriguez

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Teaching Net Present Value (NPV) and Future Value (FV)
BUS 401
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Date
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Net Present Value (NPV)
➢ NPV is used to compare the value of money that
is to be received in the future with the present
value of the same amount of money (Hickman, K.
and Byrd, J. 2013)
➢ The value of money changes with time. NPV is
calculated while making investment decision in
order to factor in changes in the value of money
in the decision making process.
➢ A given amount of money will have less worth in
the future than in the present in any situation.
2

Reasons for Time Value of Money
➢ A dollar will always have low value in the future
than in the present because:
1. People would rather consume money in the
present than in the future (Hickman, K. and
Byrd,2013)
2. Monetary inflation means that the same amount
of money would purchase few items in the future
(Fabozzi & Markowitz, 2002).
3. Uncertainty of future events exposes the
investment to significant risks.
3

Calculating the NPV
➢Obtain the cash outflows from the investments.
❑ Get the net cash flow for each period by subtracting the
cash outflows from the cash inflows.
❑ Determine the discounting rate. The discounting rate
represent the cost at which present benefits are traded for
future benefits (Dayananda, 2002).
❑ The discounting also represent the opportunity cost as
factors the gains that the investor would have made if he
would have undertaken a different project (Chass, 2005).
4

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Document Details

University

Ashford University

Subject

Finance

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