1. Calculating Present Value
So in this section of the course, we're gonna look at some common
metrics that get used to evaluate capital investment, starting With present
value. So in this particular example, we have a potential investment which
could yield us $100 each year for the next five years.
What we need to do is calculate the present value of these future
values. So we can calculate the present value by taking the future value
and dividing it by one plus I to the power n,
where I is the discount rate or the cost of capital,
and for this example, we're gonna use a discount rate of 10%.
So also in that equation, N represents the number of periods.
Let's look at an example here. We can calculate the present value of
the first $100 by dividing it by 1.10 to the power of one.
So that's one plus the discount rate of 10%
to the power of one, since it's the first period, and we get
a present value of $91. To get the present value of the next
100, we're gonna divide it by 1.10 to the power of two,
since it's the second period. And that will get us a present value
of $83. If we continue this process for year three, we get $75
for the present value, you're 4, $68, and for year five,
we get a present value of %62. Now what we do for a
final step as we simply add up all of these present values and
we get to a net present value of $379.
So what we can say is, if we were going to receive $100
for the next five years, today, that would be worth $379,
or it would be the equivalent to receiving $379 today.
So it's great to understand this theory, but... Now, let's look exactly
at how this is done in Microsoft Excel.
2. Let's practice!