net present value

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
hi all
im hoping someone call help im having problems getting to grips with present value and net present value. has anyone got any advice to help me understand this a bit better thanks :?

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:net present value

    I would imagine that you would rather be given £100 now than be given £100 but told that you had to wait 1 year to get it
    That's if you could choose!!

    One way of valuing £100 that you must wait a year to receive is the same way a bank would i.e. how much now, deposited in the bank would be worth £100 in a years time
    If you put £90.90 in now at 10% interest the interest of £9.09 virtually does it.

    In other words at a 10% rate £100 in 1 year has a PRESENT VALUE of £90.90

    If you were making a business decision say to buy a fruit machine to put in a chip shop you would be looking at a number of cash flows.
      Cash you must pay now
      Cash you must wait 1 year for
      Cash you must wait 2 years for
      Cash you must wait 3 years for
    So one way to decide whether this investment of cash now is worthwhile is to compare how much you must pay now with how much the present values add up to for the cash you will get in the future
      If the cash now was -£200
    And the future cash flows have present values of
      £90.90
      £82.64
      £75.13
    and then the asset is no longer useful,
    You can add the 4 present values together to get a NET PRESENT VALUE: in this case
      £48.69

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