# bus_401_week_2_teaching_net_present_value

Aug 25th, 2016
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bus_401_week_2_teaching_net_present_value

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Teaching Net Present Value (NPV) and Future Value (FV)BUS 401NameDateInstructor1Net Present Value (NPV) NPV is used to compare the value of money thatis to be received in the future with the presentvalue of the same amount of money (Hickman, K.and Byrd, J. 2013) The value of money changes with time. NPV iscalculated while making investment decision inorder to factor in changes in the value of moneyin the decision making process. A given amount of money will have less worth inthe future than in the present in any situation.2Reasons for Time Value of Money A dollar will always have low value in the futurethan in the present because:1. People would rather consume money in thepresent than in the future (Hickman, K. andByrd,2013)2. Monetary inflation means that the same amountof money would purchase few items in the future(Fabozzi & Markowitz, 2002).3. Uncertainty of future events exposes theinvestment to significant risks.3Calculating the NPVObtain the cash outflows from the investments. Get the net cash flow for each period by subtracting thecash outflows from the cash inflows. Determine the discounting rate. The discounting raterepresent the cost at which present benefits are traded forfuture benefits (Dayananda, 2002). The discounting also represent the opportunity cost asfactors the gains that the investor would have made if hewould have undertaken a different project (Chass, 2005).4Determine the Disco

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