NPV (Net Present Value) - Explained in Hindi - YouTube

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Namaskar, my name is Mukul, and welcome to Asset Yogi.

Where we do not lock but inlock the knowledge of finance.

In this video, I am going to talk about a very important topic

which is Net Present Value.

If suppose you want to invest in a business, in a franchise, in a project

or want to find any company's valuation

let's say you want to evaluate an investment product

that you should invest in it or not.

And whatever future cash flows will be or your income could be uneven.

In the last video, we have talked about the present value of an annuity

where the income was fixed.

For example, in the case of rent you get fixed rent every month

then you can calculate its present value easily

But if in any business or project there are uneven cashflows.

Let's suppose you invested Rs. 10 lakhs

then in one year you get Rs.1.5 lakhs in returns

in another year, Rs.2.5 lakhs

in some year your income comes around Rs.2 lakhs

and let's say you sell that project after 5 years

so in such project, you should invest or not?

will it be fruitful?

will you get your expected returns?

that is what we calculate by net present value.

So in this video, first we are going to learn the concept of net present value.

After that, we'll see that

how we do the calculation in MS-Excel or google spreadsheet

So do watch this video from start to end.

Let's go straight to the blackboard.

So, let's understand what is the purpose of net present value?

Let's suppose there's a company, which wants to invest some money in a project.

Whether you should invest in that project or not,

will depend on what per cent is the return from that project.

We call this return IRR i.e Internat Rare of Return.

Similarly, there is another calculation which we call Net Present Value.

So on the basis of Net Present Value and IRR

it is decided whether we should invest in this project or not

Now, basically, it depends upon how are the future cash flows?

Future cashflow means how much is being spent and how much profit will get

from that project.

We will also understand this from the example.

So, basically, What happens from the Net Present Value?

you can get an idea of the value of a project

or is that you can get an idea of the value of an investment product

whether you should go for that investment or not?

Or if you've already invested in a product

then by the net present value, you can calculate

how much total value have you got from that product?

Similarly, you can estimate the value of a company

and if any company wants to buy another company

then it calculates its net present value

then that also is calculated by a Discounted Cash Flow

so this net present value that we calculated,

its method is what we call discounted cash flow.

In fact, I'll make detailed videos on DCF and IRR.

So, this is the main purpose of net present value.

So, what do we need to calculate the net present value?

The first thing is How much is the cash outflow?

So, this company, which is investing money on this project

so that we should know how much will it cost upfront?

then how much will be the Net Cash Flow in future?

So, I've talked to you about future cashflow,

that how much cash flow will continue to come from this project?

how much profit will come year-wise or month-wise?

Then ne need terminal cashflow.

Terminal cash flow means that if the project itself is sold, it is sell of

after some years

after x years, after 5 or 10 years the project is sold

so that value is calculated and it is called terminal cash flow.

then the discount rate is needed

what per cent management wants the expected returns to be?

Let's say some management says we want 12% returns

otherwise, we will not invest in this project.

Once you get these 3-4 things. You can easily calculate NPV.

And decision making becomes very easy that

whether you should invest in this project or not?

Let me explain this with an example.

Let's suppose one company is evaluating a project.

Let's say it's a car rating company.

This company which I am talking about is let's say a car renting company.

which is evaluating whether we should drive a car on this route or not?

Now, whether to drive the car in this new route or not

will depend on whether the company is getting their expected returns or not?

So, let's say they invested in a car

So, let's say this is a car worth 10 lakhs.

What we will do here is we will plot it in a timeline.

Let's say if we calculate its value for 5 years

that whether it will give us sufficient returns or not?

So, firstly we will plot 0 date i.e. what's the investment in today's date?

So, here we will write -10 lakhs because the money is being spent from our pocket

So, we'll write 10 lakhs here.

Then we will project our cashflows yearly

that how much money will we get in 1st year, 2nd year and 3rd year?

And this car ranting company has a fair idea about the traffic of every route.

That this much will be the traffic. This much our car can be rented.

So, let's say in the first year, this earns a profit of Rs.1.5 lakhs.

This car, if rented to drive on that route then it earns a profit of Rs.1.5 lakhs.

Let's say in the second year, it earns Rs.2 lakhs.

Then in the third year, it earns Rs. 3 lakhs.

And as the car gets old, maybe its business goes down and

it earns Rs 2.5 lakh in the fourth year

Let's say in the fifth year, now this car will also earn something, right

so let's assume Rs.2 lakhs this car earns

And the car is sold for Rs. 4 lakhs.

So, this Rs.4 lakhs is your terminal cash flow.

So the amount for which that car will be sold, the business or assets will be sold

we call it terminal cash flow.

And this Rs.2 lakhs which are coming from operation, we call it operational cash flow.

So, how much net-net cash flow do you get here?

Here, you get Rs.6 lakhs in the 5th year, right.

So, what's our purpose now?

Now we want to calculate the net present value of this total investment

and check whether this will be profitable or not?

So, what we will do here? see, you invested Rs.10 lakhs here

So, how much total money do you get from this?

1.5 lakh,2 lakhs,3lakhs,2.5 lakhs and 6 lakhs

So, your total is actually Rs.15 lakhs

Now, you may think I am getting 15 lakhs i.e a profit of 5 lakhs, so this is a nice deal.

But you do not have to calculate this way because this is coming in 5 years

If you've seen my previous videos,

then there I've talked about the time value of money

here, you're getting the money in future,

therefore, you can't consider it a direct profit of Rs.5 lakhs.

So you have to calculate its present value basically

Whatever is your cash flow in future, you've to bring it to zero timeline.

And we have to calculate the present value for all cash flows.

That how much money do we get in 1st year, in 2nd year, in 3rd year, right?

So, we'll do all this calculation now.

Now, let's see how do we have to calculate this?

I've already discussed the formula for present value and future value.

So we will apply the same formula directly

So, what we will do here is that we will divide this 1.5 lakhs i.e. 1,50,000 by 1.12

Let's assume here we are taking the discount rates as 12%

So, what's this 12% discount rate? Basically, these are expected returns.

Management says that if we do not get 12% returns from some route

then we won't do that project.

This is our minimum requirement,right.

So, you will take the discount rate as the management's expected return.

Or else, many times we also call it waited average cost of capital.

Many times we consider waited average cost of capital as the discount rate.

I'll make a detailed video on waited average cost of capital.

But now, let's understand it as if you are taking this whole Rs.10 lakhs from market

on any interest then you can consider it as the interest rates.

Similarly, there could be an interest rate on Equity.

Equity has returns so according to them we do waited average cost of capital

together for Equity and debt.

But here for simplicity, let's take it as an interest rate only.

Let's assume there's an interest rate of 12% in the market

then you will want to get higher profit from that.

If I am taking all the money from the market,

then also I should be having some money, right.

But in this, assume that whenever you will talk about the project,

then the expected returns are what you have to consider as the discounted rate.

So, let's see how the calculation will be done here?

You've to divide 1.5 lakh with 1.12

because in 1 year you have to bring it on zero timeline

Now, for the second year, what will you do basically is

200,000 i.e you'll divide 2 lakhs with 1.12's square

we have already seen the formula for present value and future value

For present value, it was future value divided by (1 + r ) raised to the power n

So here, the future value is 2 lakhs, then you'll do 1 + rate of interest i.e 12%

and the value of n here is 2, right.

Similarly, in this way, you'll keep doing for 3rth,4th and 5th year.

So, this will be your 3 lakhs divided by 1.12 raised to the power 3

this will be your 2.5 lakhs divided by 1.12 raised to the power 4

and this will be your 6 lakhs rupees divided by 1.12 raised to the power 5

So, you can calculate these values, I am going to simply write them down here

So, the value will come out to be 133929

And this value when you'll bring these 2 lakhs into zero time line, this will be 159

and 439

After that, this value will be 213534

and this value will be 158879

this value, for the fifth year, will be 340456

we will add all these values in a zero timeline

So, basically, this will be your net present value.

If you add all these it will be your 6237

so basically, this is a positive value.

A positive value means you can do this project.

So basically, whenever NPV is positive, you can do the project

when NPV comes negative, you should not do that project.

That doesn't mean you are making a loss.

If NPV comes out to be negative,

then it just means you won't be getting your expected returns.

So, in this case, we've calculated it manually.

Now, you can do all these calculations in an Excel sheet or Google spreadsheet.

It is a very simple formula. We can calculate it straight away, within seconds.

In this way only, the concept is exactly the same.

In the same way, we can calculate the value of a project and a company

or can find the value of any investment product.

Now, let me explain to you the calculation that

how this can be calculated in MS-Excel and google spreadsheet.

So here, I have plotted all the cash flows in excel.

First, we made an investment of Rs.10 lakhs in zero year.

Then after a year, our net cash flows come about to be Rs.1.5 lakhs

Net cash flow means whatever your expenses are from that car

after removing them you get 1.5 lakh rupees.

In the second year, let's say you have left with Rs.2 lakhs.

in the third year, there's a net cash flow of 3 lakhs and in fourth year it is of 2.5 lakhs

and in the fifth year, you get 2 lakh of cash flow from operations

car was also old

and let's assume you sold that car in 4 lakhs

We are going with the assumption that this car works only for 5 years

after that we've to discard it

So can we get effective return?

So, we will see whether will this route be profitable for us or not?

So, let's understand it simply by a calculation.

Here, i will calculate NPV in two ways

First we will see according to 12% returns

that if we are considering a discount rate of 12%

i.e whether we'll get 12% expected returns or not?

Along with that, we'll also see for 15% Discount rate

that whether it becomes profitable for 15% or not?

so, what will you do to calculate NPV?

you will press equal to sign, then type NPV, open the bracket

basically, there's a formula to calculate NPV in excel

now whatever values it's asking just input them

first of all, it is asking for a rate

so this rate is your discount rate.

Now, in this case, according to 12%, we will type 0.12

now enter a comma, then give a space , then simply select all the cash flows, right

from here, our cash flows are starting and

I m selecting the cells of net cash flows till the end

I close the bracket and I enter right

So see, here we get positive cash flow

here we are not getting the exact figures which we have calculated manually

maybe there were some errors in the approximation

but it is still close to what we are getting i.e. 6200

so according to 12%, it has become profitable, which means NPV is positive

so that means we can do this project.

On the other hand, if we calculate it according to 15%

so is equal to I m pressing NPV here

and after opening the bracket, let's say I am typing the rate as 0.15

then after the comma, I'll choose all these cells, close the bracket and then enter it.

Here, we get a very negative value.

Now, this is not profitable.

Here, because the value is negative,

So, this project is not profitable according to 15%

So, if the management expects a 15% returns

cars are running very profitably in our other roots

so why do I drive the car on this route? I can drive in other roots.

And let's say the management expectations are only 12%

company is saying my all cars are giving 12% returns only or around 12%

So, if I am getting 12% returns in any route, then I'll drive my car for that route.

So here, because NPV is positive, you can do this project.

Here, I've only taken a project on a car where we are evaluating a route

similarly, we can evaluate any kind of project.

be any plant and machinery, be it a very big project

I am only talking about Rs.10 lakhs investment

It can be 10 crores, 100 crores or 1000 crores

this can be of any value.

The concept is exactly the same.

Similarly, there's another concept like that which we call internal rate of return.

Which we call IRR in short form.

I've talked to you about the per cent returns, how to calculate it?

For that I'll make a separate video, so do watch that video.

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till then keep learning, keep earning, and be happy as always.