Why You NEED to know the Time Value of Money Formula (Excel NPV function)

In this video you'll uncover the crucial concept of the time value of money and how it impacts your financial decisions. Time Value of Money is an important concept for making good investment decisions. It's based on the principle that the timing of payments is important. You'll need this at work if you're a project manager, proposing a new idea to your boss that costs money. You'll also need this for evaluating different options or choices of investments.

Here's what this video offers:

- Time Value of Money Explained: Learn why a dollar today is worth more than a dollar tomorrow due to factors like investment opportunities, inflation, and risk.
- Practical Excel Examples: Follow a step-by-step guide to understand if receiving a sum now is better than getting more money in installments over time.
- Discover Excel's Power: See how to use Excel for calculating present value, with both manual methods and the NPV (Net Present Value) function.
- Real-Life Scenarios: Understand how to apply these concepts in real business cases, like evaluating a machinery purchase or a customer's payment proposal.
- Tailored Discount Rates: Learn how the right discount rate can vary based on opportunity costs, inflation expectations, and risk assessments.

We can calculate this "time value of money" easily in Excel. In fact in this video, I'll show you an Excel template you can use to calculate the time value of money for any investment decisions.

Question: If a customer asks you if instead of paying $10,000 in cash now he could pay $10,800 over 4 years. Is that a good deal for you?

The answer depends on several factors:
1. Opportunity Costs - Money has an earning capacity. So, instead of waiting for the money, you could invest it and hopefully make more out of it. By getting the money later, you lose the opportunity to make an additional income.
2. Inflation - Prices increase over time. So, the same item will probably cost more in a couple of years.
3. Risk - Payments in the future always carry a certain risk. Will you really get the money then?
The combination of these factors defines the time value of money and is expressed as a discount rate. For instance a discount rate of 5% means that in each successive year the same amount of money is going to be worth 5% less than in the previous year.

You'll learn how to calculate Present Value (PV) manually and then we'll use the Excel NPV formula to calculate the Net Present Value in one go. Input values is the discount rate and the future cash flows.

In order to compare alternatives with different timing of payments we need to calculate their present value. In other words we need to discount future payments.
Companies often use their Weighted Average Cost of Capital (WACC) which is their average cost to get equity and debt. By applying their WACC as discount rate, any project that results in a NPV greater than zero is worth doing.

Key Takeaways:
- The further in the future the payments are, the lower their present value will be
- Think of the discount rate as a hurdle. The higher the hurdle, the more difficult it will be to get a high present value

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#excel #Finance

[uxo]

Leila is the best instructor that I have ever had to pleasure of learning from. I just love her.

[jamesperry]

_Love the clarity and simplicity and variety of this NPV video._ TᕼᗩᑎK YOᑌ!

[sachinrv]

NPV reminds me, "A bird in the hand (right now) is worth more than two in the bush".
Wonderfully explained. Even the non finance guys can easily follow this.

[Betterifitsfree]

So well explained. I used this formula (with a financial calculator) to beat up on my car finance guy and got super low rates. Glad you are explaining this Leila, excellent job once again. ⏳💰

[EricaSeeling]

Leila, you are amazing in explaining Excel in such a clear and easy manner!

[mikehoffman]

Excellent video and explanations. The authors of Accounting text books should watch this video and learn to present in a clear manner.

[PaulTrz]

Fantastic video, Leila. Thanks to it's simplicity I have finally grasped the concept of NPV!!!!

[keltonbolokonya]

I appreciate the clarity, the voice renders it to comfort in listening

[ReiszRiann]

Good thing there are like you here in YT discussing these things in a very knowledgeable and clear way! :)
Maybe you can add to your next video about WACC, NPV, IRR, FV and Ratio analysis. This will be good for MBA and accounting students like me!

Thank you very much! Much support! <3

[S_M_]

I just love the way you explain. You make excel so easy. Thanks

[excelisfun]

One of the greatest functions ever : )

[katerina]

Danke Liebe Leila, die schönste Erklärung des Kapitalwerts, Viele Liebe Grüsse 🤗

[Nico-vrkx]

Its incredible how easy it is to understand and how difficult some teachers make it look

[zeno]

One pitfall to be wary of is to calculate the rate you need to make the investment worthwhile (in terms of npv) then to let yourself be convinced (with ad hoc reasoning) that rate is perfectly reasonable and achievable. You really need to understand what rate you need before you work out what the npv is for a particular investment!

[shahidulhasansarker]

I have seen 10+ tutorial about npv but dont understand fully but now i understand. Thanks my Lady Excel Lord Leila Gharani. I always

[peterasteberg]

This is the best explanation I've ever heard, never understood this before... Thanks!

[farzanmoha]

I appreciate you Leila, you are an amazing teacher. The way that you explain along with visual features, make learning sweet and easy.

[Yeoman]

Ms. G, nice job as always. Your knowledge of Excel is the cake; your clear, concise presentation is the icing on that cake. Thank you.

[dennisd]

Nice introduction to Present Value. When I teach The Time Value of Money I always start with Future Value as the idea that if I invest a dollar and earn interest I will have a dollar plus. Students tend to understand this better. Then I can explain Present Value by show that I am indifferent to a dollar now or the dollar plus in the future (for the given discount rate).

[amirierfan]

Hey Leila! This series is truly useful! Please keep going...