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.