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Net Present Value (NPV)

Last updated over 6 years ago
3 questions
Time value of money
1

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

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!
2

The concept that money today does not have the same value in the future. This is due to the impact of:1 2

2

There are also other reasons why value of money will change in the future from what it is today. State two reasons (that are different to question 2).

Discounted cash flow
Present Value (PV)
Lump sum PV
Annuity
Advantages of NPV
Disadvantages of NPV