Watch this amazing video of Finance Guru, Vishal Thakkar to know about net present value along with examples to make it easier for you.
Ladies and gentlemen boys and girls welcome back to finance tube this is vishal tucker your friend and your finance guru yet with another topic called a net present value npv friends this is the most searched topping on the internet when it comes to finance let’s understand what npv is all about npv as the name suggests the net present value of project cash flows
So let’s say if we have a project where we have 100 crore investment currently and it gives us cash inflows in future so as we saw in our other video time value of money we have to bring all the future cash inflows to today’s value and compare it with the today’s cash outflow so your total cash inflow over the projected life cycle compared with the cash outflow
Today will tell us if positive we are making money in this project if negative we are not making money in this project however a very important factor which decides whether this comparison will be positive or negative is the rate at which you will discount the future cash inflows so if a management of a company has a particular cutoff rate below which they would
Not like to do any projects then you will discount all your future cash inflows at that rate and find out by comparing the present value of all future cash inflows with today’s initial cash outflow or initial investment and whether it is positive or not if it is positive then we conclude that the npv is positive if it is not then we say that the npv is negative so
If npv is positive we accept the project if npv is negative we reject the project now friends calculation of npv is fairly simple all you need to know is the cash outflow today the projected cash inflows in the future the terminal cash flows and the rate now theoretically lot of books that you read will suggest that hey you know you should take cost of capital
Or wacc which is weighted average cost of capital as the rate for calculating npv but in real life many a times either the cost of capital is not known or even if it is known each management would like to put some more weight edge one cost of capital because of the risk involved in the project and may suggest a higher cutoff rate compared to cost of capital for
Discounting your cash flows so this is very basics of npv for further details don’t forget to watch our video called npv versus irr what is irr we’ll see in one of our next videos we all know that people from non finance background struggle to manage their finances they hid the reality when they get their first paycheck and from then on they are all by themselves
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Transcribed from video
What Is Net Present Value? Explained With Examples | Vishal Thakkar By Finance Tube