B5 Net Present Value
Unit 7: Business Decision Making
Net present value takes into account the fact that the value of money received in the future is worth less than if it was received today. This is because it could be invested to gain value and because inflation decreases the value of money over time. When calculating the current value of money received in the future, you can multiple by the discount factor which is predicted based on interest rates (see table).
E.g. If you expected to have cash flow of $1000 in 5 years time and the discount rate is predicted to be 5%, you would multiply $1000 by 0.784. This means that $1000 received in 5 years time is worth $784 in today’s money.
