Net Present Value - Revision history

DavidB4-bot: /* top */Spelling/Grammar Check, typos fixed: invesment → investment

2016-07-29T13:53:53Z

top: Spelling/Grammar Check, typos fixed: invesment → investment

DavidB4-bot: /* top */clean up & uniformity

2016-07-13T16:34:06Z

top: clean up & uniformity

Aschlafly: undeadend

2007-10-20T11:54:51Z

undeadend

TraJSmith: Gave example of discount rate - controlled normal desire to be clever

2007-09-13T18:15:26Z

Gave example of discount rate - controlled normal desire to be clever

Tash at 19:46, September 10, 2007

2007-09-10T19:46:58Z

Tash: Parody removed

2007-09-10T19:46:46Z

Parody removed

TraJSmith at 18:17, September 10, 2007

2007-09-10T18:17:28Z

TraJSmith: New page: Net Present Value is a method to estimate the current value of future cash flows. In its simplest form, Net Present Value applies a discount rate to a future cash flow number and the produ...

2007-09-10T18:17:04Z

New page: Net Present Value is a method to estimate the current value of future cash flows. In its simplest form, Net Present Value applies a discount rate to a future cash flow number and the produ...

New page

Net Present Value is a method to estimate the current value of future cash flows.
In its simplest form, Net Present Value applies a discount rate to a future cash flow number and the product is the Net Present Value.

The discount rate may have many components; Internal Rate of Return (IRR), Cost of Capital, Cost of Debt, Risk, and so on.

Let's consider a simple example. Suppose, ignoring Shakespeare's advice I lent $100.00 each to two friends of mine, due one year from today.

One friend calls up and asks me how much will I accept from him if he pays today. Because I am getting currenlty getting 5.27% on my invesments, and this fiend is almost risk free (he is conservative) I tell him I will accept $95.00. This $95.00 is the Net Present Value of the $100.00 owed to me. The discount rate I used was my IRR.

My other friend, a Wikipedia editing liberal also owes me $100.00 one year from now. Fearing he will contribute all his money to left wing candidates in the upcoming election, I call him and tell him I will clear of his debt if he gives me $90.00 today. My discount rate, now 10%, includes the original IRR but also an additional factor for risk.

Note then, that while the lender (me) and the product (money loan) remained the same, the discount factor, hence present value, can and will change.

@@ Line 6: / Line 6: @@
 Suppose you lent $100.00 to Person A.  It is to be repaid within one year.  You would like a return of 5% on your money you expect inflation to be 2%, and your assessment of risk for this person leads you to add 1% to the discount rate.  This means you would assign a discount rate of 8% to this loan.  If this person approached you suggesting, I will give you $90.00 today to discharge my loan, you would counter that you needed at least $92.59.  (92.59 x 1.08 = $100.00)
-Usually a [[corporation]] will use a Weighted Average Cost of Capital as a discount rate when NPV is the appropriate method of evaluating an invesment or capital expenditure.
+Usually a [[corporation]] will use a Weighted Average Cost of Capital as a discount rate when NPV is the appropriate method of evaluating an investment or capital expenditure.
 [[Category:Finance]]

← Older revision		Revision as of 16:34, July 13, 2016
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−	[[Category:~~finance~~]]	+	[[Category:Finance]]

@@ Line 2: / Line 2: @@
 In its simplest form, Net Present Value applies a discount rate to a future cash flow number and the product is the Net Present Value.
-The discount rate may have many components; Internal Rate of Return (IRR), Cost of Capital, Cost of Debt, Risk, estimated inflation and risk.
+The discount rate may have many components; Internal Rate of Return (IRR), Cost of Capital, Cost of Debt, Risk, estimated [[inflation]] and risk.
 Suppose you lent $100.00 to Person A.  It is to be repaid within one year.  You would like a return of 5% on your money you expect inflation to be 2%, and your assessment of risk for this person leads you to add 1% to the discount rate.  This means you would assign a discount rate of 8% to this loan.  If this person approached you suggesting, I will give you $90.00 today to discharge my loan, you would counter that you needed at least $92.59.  (92.59 x 1.08 = $100.00)
-Usually a corporation will use a Weighted Average Cost of Capital as a discount rate when NPV is the appropriate method of evaluating an invesment or capital expenditure.
+Usually a [[corporation]] will use a Weighted Average Cost of Capital as a discount rate when NPV is the appropriate method of evaluating an invesment or capital expenditure.
 [[Category:finance]]

@@ Line 2: / Line 2: @@
 In its simplest form, Net Present Value applies a discount rate to a future cash flow number and the product is the Net Present Value.
-The discount rate may have many components; Internal Rate of Return (IRR), Cost of Capital, Cost of Debt, Risk, and so on.
+The discount rate may have many components; Internal Rate of Return (IRR), Cost of Capital, Cost of Debt, Risk, estimated inflation and risk.
 [[Category:finance]]

← Older revision		Revision as of 19:46, September 10, 2007
Line 1:		Line 1:
−	Net Present Value is a method to estimate the current value of future cash flows.	+	'''Net Present Value''' is a method to estimate the current value of future cash flows.
	In its simplest form, Net Present Value applies a discount rate to a future cash flow number and the product is the Net Present Value.		In its simplest form, Net Present Value applies a discount rate to a future cash flow number and the product is the Net Present Value.

← Older revision		Revision as of 19:46, September 10, 2007
Line 3:		Line 3:

	The discount rate may have many components; Internal Rate of Return (IRR), Cost of Capital, Cost of Debt, Risk, and so on.		The discount rate may have many components; Internal Rate of Return (IRR), Cost of Capital, Cost of Debt, Risk, and so on.
−
−	~~Let's consider a simple example. Suppose, ignoring Shakespeare's advice I lent $100.00 each to two friends of mine, due one year from today.~~
−
−	One friend calls up and asks me how much will I accept from him if he pays today. Because I am getting currenlty getting 5.27% on my invesments, and this fiend is almost risk free (he is conservative) I tell him I will accept $95.00. This $95.00 is the Net Present Value of the $100.00 owed to me. The discount rate I used was my IRR.
−
−	My other friend, a Wikipedia editing liberal also owes me $100.00 one year from now. Fearing he will contribute all his money to left wing candidates in the upcoming election, I call him and tell him I will clear of his debt if he gives me $90.00 today. My discount rate, now 10%, includes the original IRR but also an additional factor for risk.
−
−	~~Note then, that while the lender (me) and the product (money loan) remained the same, the discount factor, hence present value, can and will change.~~

	[[Category:finance]]		[[Category:finance]]

← Older revision		Revision as of 18:17, September 10, 2007
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	Note then, that while the lender (me) and the product (money loan) remained the same, the discount factor, hence present value, can and will change.		Note then, that while the lender (me) and the product (money loan) remained the same, the discount factor, hence present value, can and will change.
		+
		+	[[Category:finance]]