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.
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Professor Savings signing off.