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Learn net present value in 2 minutes

Welcome to Professor Savings.com

We teach finance basics. Hi, I’m your host today Rayfil Wong.

Today’s topic. Learn net present value in under 2 minutes.

Let’s talk about why and why we use this.

Sometimes we need to determine whether a project or business decision is worth making.

So net present value is simple…

Calculate net present value by comparing two things.

Initial cost of a project to total value of future revenue.

Let’s say Jane of Jane’s Super Cupcakes is trying to decide whether to buy a new high tech oven to speed up baking.

Jane’s sells her cupcakes at $4 each and profits $2 from each cupcake.

Now the  oven allows her to make 2000 more cupcakes each year.

2000 more cupcakes each year but the hi tech oven cost $30,000.

So Jane does the math.

Oven cost $30,000

Revenue ( $2 times 2000 ) = $4000

$4000 times 10 years = $40,000

so we need to examine.

$40,000 minus a discount rate. In other words, what we could have with the money

  in that 10 years of $30,000 instead.

Say…. $30,000 put in a bond for 10 years plus interest rate.

This is just the basic concept.

   Consult your financial advisor for more details.

Please subscribe to our channel if you want to learn more on finance basics.

Professor Savings signing off.



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