Net Present Value (NPV)

Last updated about 7 years ago

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Time value of money

The Proposal: Would you rather have $5,000 today or $5,000 in five years time? What is your decision?

Today

5 years time

Time value of money

$5,000 can be invested today and if it earns 6% interest each year for the next 5 years it will accumulate to $6,691.
Time is important as it provides you with the opportunity to earn interest.
$5,000 today will also buy more than $5,000 in 5 years time.

Correct answer: Take the money today!

Discounted cash flow

Present Value (PV)

Lump sum PV

Annuity

Advantages of NPV

Disadvantages of NPV