Net Present Value and Time Value of Money

https://www.youtube.com/watch?v=xkHqP_dXRfE&list=PLMPgqm9ZhNdLLrN5QmapFNx6yVE2A5BAm&index=3

Time Value of Money

• Receiving one $ now is worth more than a $ in the future.

• This is due to the potential earning capacity of money, which can earn interest over time. Therefore, money available today can generate returns, making it more valuable than the same amount in the future.

• If not invested it will erode over time due to inflation.
  

Discounting

Compounding

Simple vs Compound Interest

Net Present Value (NPV)

NPV is the difference between the present value of cash inflows and outflows over time, indicating the profitability of an investment.

Useful for comparing projects with different cash flow patterns lifespans and risk profiles.

NPV Eqn

Perpetuity

A cash flow which continues into the future indefinitely.

example includes: Gov. Bonds