How to Calculate Net Present Value (NPV)

Video Transcript

"Hi, I'm Steve Jones, and I'm going to show you how to calculate net present value. Now, as you know you've got money, well I hope you've got money. The money you've got, if you keep it in your pocket or stuff it under the bed or bury it in the ground, will not increase in value. But money put into a bank or put into a business is going to increase in value and therefore we have to have a way of expressing what that value really is. Now here we've got a cash sum today, and we know that one quarter later, a quarter is three months, three months later, it is going to be worth more. And therefore, when we look in a business plan or we look at some financial figures, we will see a figure which is larger. We will want to know what that actual figure means in reality, at present prices. So here we have the cash sum we're talking about, we see that at the beginning of the quarter it was worth two thousand dollars. Now at the end of this quarter, with a rate of ten percent, increase over the quarter, we have inserted in this formula, and notice it's on the bottom this rate, we've inserted zero point one for the ten percent. So one minus zero point one gives us zero point nine. Now when I work out this calculation we can see that the actual value should be two thousand two hundred. If I'm in business and I've invested this money, and I have actually not two thousand two hundred but I have two thousand one hundred, then I'm not going to be very happy if I've got two thousand three hundred, I am going to be happy. But what this does, it enables us to look at a sum of money earlier in a program and see what it's actual value should be at this present time."