NPV In the Real World; NPV Equation

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来自 University of California, Irvine 的课程

微观经济学的力量：真实世界中的经济学原理

828 个评分

University of California, Irvine

微观经济学的力量：真实世界中的经济学原理

828 个评分

In this course, you will learn all of the major principles of microeconomics normally taught in a quarter or semester course to college undergraduates or MBA students. Perhaps more importantly, you will also learn how to apply these principles to a wide variety of real world situations in both your personal and professional lives. In this way, the Power of Microeconomics will help you prosper in an increasingly competitive environment. Note that this course is a companion to the Power of Macroeconomics. If you take both courses, you will learn all of the major principles normally taught in a year-long introductory economics college course.

从本节课中

The Capital Market, Interest, and Profits

Capital Analysis in the Real World; Three Categories of Capital Goods; Interest Rate Defined; Rate of Return 7:37

Depreciation; Theory of Loanable Funds; Two Interest Rate Functions 5:46

How Shifts in Demand and Supply Affect Interest Rates; Investment Analysis Over Time; Net Present Value; Perpetuities6:48

NPV In the Real World; NPV Equation 4:11

Real World Applications of NPV 4:39

Interest Rates In The Real World; Factors Determining Interest Rates 3:24

与讲师见面

Dr. Peter Navarro
Professor
Paul Merage School of Business

[MUSIC]

Now, having seen this simple case of a

perpetuity, let's try something even a little harder.

Suppose that instead of an asset generating the same amount of income

each year, the asset generates a different amount of income each year.

And further suppose, that instead of generating a stream of income from

now to eternity, like our indestructible

apartment building, the asset generates a stream

of income over a fixed period of time.

Maybe five years, maybe ten years, maybe 50 years.

Here's an example of just such an investment.

Suppose you are the chief executive officer

of a textile company, and that your

company is considering replacing your old mechanical

looms with a set of highly computerized looms.

These new machines won't come cheap.

The price tag is a cool

$2 million.

Note however, that your chief economist forecasts

that these new machines will increase revenues

by $500,000 for each of the five years of the service life of the looms.

Also, at the end of five years, the

machines will have a salvage value of another $500,000.

Now from this data, it may seem pretty

obvious that the company should make the investment.

After all, while the machines will cost $2 million, they will generate an even

cooler $3 million in revenues and salvage value over the five-year period.

But wait.

Let's not forget about the time value of money.

And here's the formula you would use to

calculate the net present value of this investment.

In this equation, I0 is the initial investment at time period 0.

I is the one period market interest rate and for this

example, we'll assume that that interest rate is constant at 15%.

Now, N sub 1 is the net receipts from the investment in the first period or year.

And N sub 2 is the net receipts in the second period during the year, and so on.

Then, the sum of the initial investment and the stream of payments, N sub 1, N

sub 2, and so on, will have the present value, NPV, given by the formula.

Now let's use this formula to calculate

the net present value of our loom investment.

Here's the math.

We start off with our initial $2 million investment,

which has a negative sign, because it is an outlay.

Then, we must discount the income stream of $500,000

per year, plus the $500,000 the company will

receive at the end of the fifth year as salvage value.

This gives us an NPV of $1,924,664 for the

income stream. Subtracting that from our initial $2

million dollar investment, we find that the actual NPV of the

total investment is a negative sum, minus $75,336.

Now, because the net present value of the investment

is negative, your company should not make the investment.

And note, that this is despite the fact that

over the life of the investment, the investment will generate

an undiscounted sum a full half

million dollars greater than the initial investment.

Now, what about if the interest rate were 5%.

Would your company now make the investment?

Yes, your company would make the investment.

This is because the value of that investment in net present

value terms is positive at the prevailing cost of borrowed funds.

Put another way, by making the investment, you would increase your profits.

From an intuitive perspective, what's happening is this, the higher the

interest rate, the more one has to discount the revenue stream.

This, in turn, reduces the present value of the revenue stream and vice versa.

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