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馃敶 NPV & Net Present Value with NPV Formula & Net Present Value Formula & NPV Calculation (Easy!) - YouTube
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Hi guys, welcome to the super easiest video
on net present value calculation.
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You will be shocked, remember you can always
go back to my website for more free videos.
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Alright if I go too fast in this video no
problem.
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Just watch my slower video by following the
instructions down here.Alright, so I'd like
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to start with the word net.
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What do we mean by net?
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Well it's usually the result of different
amounts combined.Let's say you are at an expensive
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restaurant and the food is $100, but you have
a $15 discount, then we can say that the cost
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is or the price is $85 net.
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Okay, so now how do we apply that to business? Well
let's say that you gave your friend $100 today
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under the agreement that you will get back
$105 next year.
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So I write this down as negative because you're
paying it, and this is positive because you
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are receiving it.
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So in this case you have a net value.
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A simple net value of $5.
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Where do we get the $5?
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Well $105 less $100 is $5.
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Does this look like a good deal to you?
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I think it looks like, it seems like a great
deal because you give a $100 you get back
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a $105 you gain $5, however this is only the
net value.
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It is not yet the net present value.
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Present means today and when we think about
the net present value because present means
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today, we have to think about the time value
of money and interest rates in the market
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right now.
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So let's just pretend that interest rates
right now given by the bank or any other risk
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free place, like the government.
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Interest rates are at 6%.
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So what does time value of money mean?
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It means that $1 today is worth more than
$1 given to you tomorrow.
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And isn't that true, wouldn't you prefer that
I give you $1 today instead of promising to
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give you $1 tomorrow?
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Even if my promise was good you'd prefer to
have the $1 given to you today.
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Why?
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Well because, for example $100 or $1 whatever,
let's just say $100 put in the bank today
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at a 6% interest will be worth $106 next year.
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That's the same as saying if bank interest
is at 6% then $106 given next year is the
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same as only $100 given today.
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You see?
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So then now that we know that, how do we get
the net present value?
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Well, it's very simple.
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The first step is this, boom!
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What is this?
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What are these scary numbers over here?
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Well if you don't already know, this is the
simple present value formula.
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The simple present value formula.
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And what makes it different from the net present
value formula over here?
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Net, this one is simple.
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Well this for one number okay.
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Instead of a combination of numbers.
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When we say net present value, we're talking
about a combination, remember.
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So that's the difference between simple and
net.
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So where do these numbers come from?
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Well very simple.
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This $105 comes from here.
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This .06 represents the interest rate over
here.
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And the negative one over here represents
this one year over here, as simple as that.
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Now, first important question, why is it .06,
okay why not .6?
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Well remember in percentages 6% is written
as .06 okay.
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If you wrote.6 here that would be 60% and
not 6%.
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Why is it a negative one over here for this
one year later?
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Well, remember were trying to get the present
value or the net present value of these 2
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amounts today.
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So in this present value formula over here,
we're trying to get the value of $105 given
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next year, but we want to know the value of
this $105 today, one year earlier.
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So, to represent the fact that we're bringing
this $105 backward by one year, we put a negative
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one.
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It is negative because we go backwards.
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Okay, and very important.
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In your textbook or with your professor you
might not see the present value formula looking
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like this.
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It might look something like this instead.
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That's the long way.
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This is a traditional way because if your
calculator sucks and you don't have a scientific
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calculator then you cannot do the negative
one (-1) and you have to put a positive one
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(+1), but if you put a (+1) then you have
to bring this stuff under the $105 and make
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it look like this.
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I do not recommend this.
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It's more confusing if you ask me.
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So I suggest you just buy a good calculator.
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Alright so back to our formula.
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Are we done yet in the formula?
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No, remember net present value.
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Net is a combination of these two.
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So now, we also have to do boom!
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This, so what is this?
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First of all I'll explain later.
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If you want, you can delete this.
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I might as well explain it now.
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If you want, you can delete this and the value
will still be negative (-$100).
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So don't be surprised if your textbook just
has the $100 over here, but there's nothing
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over here because you can delete this if you
want, but personally I do not like to delete
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it, why, I like to keep it consistent with
this over here to avoid confusion.
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Okay, after you're already used to all these
formulas then go ahead and delete it.
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So let's continue.
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Now where does this negative (-100) come from?
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Again comes from this.
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Where does this .06 come from?
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Comes from the 6%.
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Where does this -0 come from.
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Where does this (-0) comes from?
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Remember, in this case over here we had a
negative one (-1) because we wanted to know
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the $105.
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The value of the $105 one year backward, one
year earlier.
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However, in this case.
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This negative 100.
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In this case this negative 100 (-100) you
are paying today.
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So you're bringing it back by 0 years, by
0 years, so that's why I have a negative zero
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(-0) over there, but like I said you can delete
that if you want.
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You can delete this whole thing if you wish
and the value will still be the same at negative
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one hundred (-100), but I prefer to keep it
so that it's consistent and not confusing.
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Alright, so now using our scientific calculator.
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Okay, we get this, boom!
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$105 multiplied by 1.06 raised to the (-1)
we get 99.06.
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What does this mean?
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This simply means that 99.06 is the present
value of $105.
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If we take interest rate into account then
$105 given next year is the same as $99.06
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given this year.
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Next step let's simplify this, simplify this,
boom!
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There we go.
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You see that, so this is what I mean by you
can delete the 1.06 if you want because as
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you can see when we simplify this whole thing,
it comes out the same as this.
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Alright so there we have it.
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We now have our net present value formula.
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So if we simplify it further using our scientific
calculator, we get, what, we get boom!
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Negative 94 cents.
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See as you can see this negative 94 cents
is a lot less, sorry net present value is
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negative ninety four cents, which is a lot
less than the simple net value of $5.
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So what does this mean?
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What this means is that in simple numbers,
we gain $5, but in present value dollars,
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meaning we take the value of this money today
then we lose 94 cents if compared to what
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you would have gotten if you deposited your
money in the bank instead.
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To simplify it further in a case like this
if your net present value is positive, you
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win.
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If it's negative you lose.
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So there I hope you enjoyed it, so remember
to share it if you like it.
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I have more free videos on my website MBAbullshit.com
more than on You Tube.
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So please do visit my site.
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You can also see my videos on YouTube.
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Follow me on Facebook and on Twitter.
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So that's it.
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Have a great day and good bye.
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