Understand the Net Present Value NPV

Which is better, to have 100$ now or to have 110$ after one year? In this article, I will explain what the time value of money is, and how to make your financial decisions based on these simple calculations to understand the net present value NPV.

1.     Future Value of Money!

100$ today does not equal 100$ after one year. This is because the money loses some of its value each year. Furthermore, you lose an opportunity to invest your 100$ for this year.

For example, if you deposited your 100$ in a bank, you would withdraw 110$ by the end of the year. This concept is called the time value of money, and by understanding this concept you would make better financial decisions for yourself, or even for your company. The amount of lost investment and value losses is called the discount percentage.

2.     How to calculate future money?

The Net Present Value (NPV) takes into account the value of the dollar today compared to the value of the dollar in the future, which is why it is a very important value to look at before making any large financial decisions. The formula of NPV is below:

Cash Flow = net cash inflow during the period

r = discount rate

i = number of periods in months or years

Applications of NPV:

Let’s say we have four projects, which one is better for your organization?

Cash Flow Estimate for Project A (all figures are in €M Euro):

Cash Flow Item FREE COURSE Construction Project Management Fundamentals Course Learn how real construction projects are planned, managed, and controlled — from initiation to closing — using practical methods to deliver on… 7,555 students WhatsApp support group Certificate Start free	Year 1	Year 2	Year 3	Year 4	Years 5–15
Yearly Cash Flow	€4.10	€2.25	€4.65	€8.50	€10.27
Capital Investments	6.90

This concept applies to your life situations as well, you make decisions to sell your car with x amount in cash or x+y amount in installments where y is calculated from the NPV.

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