pv and npv
Cash Flow Streams Same Amounts but different NPV?
I asked this yesterday:
How can you compare the calculated PV in light of the fact that the undiscounted cash flow totals $150,000 in each case?????
15%
Cash Flow Stream
year a b
1 …. 50,000 ….10,000
2 …..40,000 …. 20,000
3 …. 30,000….. 30,000
4 …. 20,000 …. 40,000
5 …..10,000 …. 50,000
..150,000 ..150,000 totals
For “A” using financial tables total NPV is $109,856.33 and using Excel an function the total NPV is $109,856.33
For “B” using financial tables total NPV is $91,290.00 and using Excel an function the total NPV is $91,272.98
Here is the answer I got:
You compare $109.9K vs $91.3K. Given the choice you would select Option A as this yields the higher result, reflecting the fact that you have a higher amount of $$ in the early period of the cash flow stream.
The question remains: why the same totals but different NPV
It’s only common sense. It is better to get 50,000 (more money) in the first year so that you can invest it elsewhere for additional profit, than to have 10,000 (less money)in the first year. Money has time value. A dollar in year one worth more than a dollar in year five. Mathematics calculation only confirm this common sense.
How to compute Net Present Value or NPV with a calculator
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