The net present value of an investment is the present value of the investment minus the amount of money it costs to buy into the investment. All of the investment’s cash flows must occur at the same interval for the calculation to be accurate. If all of the investments have the same level of risk, then you should go with the investments with the highest net present value.
- [Voiceover] One of the most common metrics…for evaluating projects is by net present value.…The net present value calculates the total return…on an investment given a series of cash flows,…including the initial investment…as well as the discount rate.…The discount rate, which in the case is four percent,…is the amount of money that you can make…in an absolutely safe investment.…Many investors use treasury bills in the United States,…especially the 10 and 30 year variety as a zero risk asset.…
However, because yields have gone down,…they have looked for other slightly more risky…but still essentially zero risk assets.…For the purposes of demonstration, we'll use a discount rate…of four percent as our safe zero risk investment return.…However, you should definitely consult with a licensed…financial advisor or accountants or finance people…within your company before making your decision…about what value to use.…Most companies tell you what to assume…when you do this sort of calculation.…I have two investments here, and the first one,…
- Analyzing loans, payments, and interest
- Calculating depreciation
- Determining values and rates of return
- Calculating bond coupon dates and security durations
- Calculating security prices and yields
- Calculating prices and yields of securities with odd periods
Skill Level Intermediate
1. Analyzing Loans, Payments, and Interest
2. Calculating Depreciation
3. Determining Values and Rates of Return
4. Calculating Bond Coupon Dates and Security Durations
5. Calculating Security Prices and Yields
6. Calculating Prices and Yields of Securities with Odd Periods
Additional resources1m 24s
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