Enjoyed this video? Then please subscribe to the channel, and let's review what WACC means and how WACC is calculated: th-cam.com/video/1O-DbtVueMw/w-d-xo.html
@@madonnasanjose2777 100 rupee today 20% interest for 1 year next year the value would be 100 + 20% of 100 = 120 or simply 100 * 1.2 = 120 if future value is 120 the the initial value is x (assume) so x + 20 % of x = 120 x + 20x/100 = 120 1.2x = 120 x = 100 now you understand meaning of 1.2?
This is why teachers over the world are in such a noble profession. When you take any concept and explain it in such detail but with such ease of understanding - it is such a beautiful thing.
Thank you very much for the kind words. 😊 Have a look at the related video on IRR as well, I think you will enjoy that too: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Ive been studying economics, business and finance for 5 years since i was in high school till now and ive had many teachers teach me this. But the way i understood it now more then ever in 5 minutes is crazy
Thank you for the kind words! Please share the video/channel with friends and colleagues. Have a look at the related videos on IRR and WACC as well: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html&pp=gAQBiAQB
Happy to help, Sammie! Here's the link to my playlist covering the related concepts IRR, WACC, profitability index, etc. as well: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
After watching two videos the whole night, the following morning I decided to revisit this NPV & I came across your video, OMG easiest explanation ever!!!!🥰
Wonderful to hear that! Thank you for the kind words. I have videos on related topics like IRR as well for you: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html&pp=gAQBiAQB
THANK YOU. I struggled with this in college. I struggled the first time I took my licensing exams. I'm struggling again the second time I'm taking them. I understand it now!!
Wow, thanks! Nice to hear that, Hasnaa! Here's a link to the playlist covering related concepts (IRR, payback, crossover rate, WACC): th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Thank you, I just spent 2 hours replaying a lecture recording from Queensland University of Technology in Australia and couldn't understand this simple concept. I watched your 5min video once and I now understand it. SOMEBODY PLS EXPLAIN TO ME WHY UNIVERSITY STILL EXISTS.
Wow, I am so sorry to hear that the quality of that lecture was so poor. Here's a link to my playlist covering related topics IRR, WACC, etc., as they are probably up next for you to study: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html If you want to ask the university for a refund, and then send the money to me, you are more than welcome. 😎 th-cam.com/channels/QQJnyU8fALcOqqpyyIN4sg.htmljoin
Thank you, Kunal! Please share the link to the video/channel with fellow students, and have a look at my videos on IRR and WACC as well: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Excellent! Here's the link to the playlist that might be useful for you as well, explaining related concepts like IRR and WACC th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Yeah, WACC is a questionable concept. Extrapolating from past averages, whereas the future often does not resemble the past at all. Anyway, I discuss the concept as well as my frustrations with it in this video: th-cam.com/video/1O-DbtVueMw/w-d-xo.html The heuristic-based (rule of thumb) hurdle rate is less pretentious and far easier to understand: th-cam.com/video/8EyFLdOTuHU/w-d-xo.html
So easy to understand bro! Thanks tons. It was perfect, you just give the elemental theory and move on to the hands-on part, where we really struggle haha
Hello! Let's take it step by step. Have a look at the time value of money video first th-cam.com/video/gkp-7yhfreg/w-d-xo.html and make sure you thoroughly understand the concepts of future value and present value. Once that is the case, move to Net Present Value. For some people, playing around with NPV in Excel makes them understand it better than going through a theoretical discussion, you could try that as well: th-cam.com/video/jQ_NDQ2qVVA/w-d-xo.html
At 5:06 in the video you show a weird E type symbol. What exactly does that mean? Can you translate that symbol and letters into the numbers used in your example? Please help. Thank you
Hello Joe! That's the mathematical symbol for "sum", indicated by a letter of the Greek alphabet, called the "uppercase sigma". It means you need to sum the present values of the future cash flows for all the years that are in scope for the project. Earlier in the video, I was showing an example of a project where you invest today in return for benefits during the next 4 years. The mathematical formula makes it more generic, so you can apply the NPV concept to projects of 3 years, or 10 years, or 20 years, etc.
Npv is the difference of cash outflow today for starting up the project and the present value of all the cash inflow that project generate💚 Npv= investment - present value of cash inflow.
First part is correctly stated. The correct formula is Npv = present value of future cash inflows - investment. This way if PV>inv, then it is a positive number. If PV
ij nootist det yoe hev ee verrie Dutch eksent, so ij asyoem det yoe ar Dutch hahaha 🤪 Thank you very much for the clear explanation. You really helped me 🙏🏾
Yoe nootist iet korrektly! 😎 Happy to hear it was helpful anyway! Did you check out the related videos on IRR and WACC as well: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
My pleasure, Catalin! Related concepts like IRR and WACC are discussed in this playlist: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html&pp=gAQBiAQB Feel free to connect on Linked In!
So the difference between NPV AND PV is that NPV is basically the net ammount of costs and return profit from mutliple years and PV is just the ammount invested at the start? Also I dont really understand your slogan saying time is money. I get it obviously but not how it applies to NPV. Were calculating the costs so we can see if we make profit by investing into this company. But what does time have to do with it? It's just about the cost and profit ammounts no?
Have a look at my "time value of money" video th-cam.com/video/gkp-7yhfreg/w-d-xo.html It will answer most of your questions. In these investment calculations, we compare the investment (today, cash outflow) to future benefits (cash inflows). In using the term PV, I can refer to a single amount that is "translated" from the future to today, or multiple amounts. In using the term NPV, I deduct the investment amount from the present values of the future benefits. So "net" refers to net of the investment.
Hello! I have a more complex question. In theory, if markets are efficient, the net present value of investing in any stock (no matter what is the risk of the stock/ rate of return/ discount rate) should be equal to zero. That means if markets are efficient, investing to stocks leaves no profit? It doesn't make sense in my head. Can you please explain it to me? Let's say I invest 100$ and I make 20$ in one year. I actually made 20$ profit cash. How is the NPV=0?
Hello Konstantinos. Yeah, that's one of those very far-fetched propositions, that is very far removed from real life. It took me a while to think through this. Here's what I came up with (I can explain the steps, but don't agree with this view of the world). I guess that the core idea of efficient markets, is the assumption that all available information has been taken into account when pricing assets, therefore there is no room to make superior returns or beat the market. It doesn't mean that you cannot make any profit at all (on a "nominal" level like in your example), just that the profit levels are fairly representing the risk level. An example would be: Project A requires $1000 of investment (in year 0), gives you 4 times $400 benefits in the next years (years 1 through 4), at a discount rate of nearly 22% that indicates a very high risk level, therefore NPV = 0. See also my video on IRR in Excel: th-cam.com/video/L0JCg5TXudc/w-d-xo.html Your nominal benefits are $600 (= $1600 minus $1000), but risk-adjusted and time-adjusted through WACC and NPV the returns "are zero". Project B requires $1000 of investment, gives only 4 times $300 benefits in the next years, at a discount rate of nearly 8% that indicates a much more modest risk level, therefore NPV = 0. This time, nominal benefits are only $200 but at a much lower risk profile. This line of reasoning argues that project A and B are equally attractive. Instead of the above, take a look at the works of Nassim Taleb. He argues that the world is much more powerlaw driven than Gaussian (standard deviation driven). What is essential is to recognize fragile - robust - antifragile, rather than to forecast. Hope this helps!
Yes, most people use WACC as a synonym for discount factor. You could also use the hurdle rate as the discount factor, which is explained in this video: th-cam.com/video/8EyFLdOTuHU/w-d-xo.html In-depth discussion of the pseudo-scientific WACC over here: th-cam.com/video/1O-DbtVueMw/w-d-xo.html
Is something wrong with that? If I deposit $1,000 with 20% interest rate I would have 2073 after 4 years. This investment will give me only 1600 after 4 years. So why is it worth?
It's not the same thing. What you are talking about is two cash flows: $1000 outflow now, and one lump sum / bullet payment cash inflow at the end of the 4 years. My example has five cash flows: $1000 outflow now, and then every year 1 through 4 $400 of cash inflow. Timing is different.
Hi i would like to ask, how many years do you calculate? And do we need terminal value? Using this calculations all of the stock price valuations will not come close to what we call a positive value. Thank you for explaining.
Hello! For the example in this video, just 4 years of savings/benefit for the CapEx project. For stock price valuation, usually 10 years' horizon plus a terminal value. And I agree, at current valuations of some shares, it is hard to "justify" the current share prices based on DCF. Check my video on WACC as well: th-cam.com/video/1O-DbtVueMw/w-d-xo.html
Great to hear that! Thank you for watching and commenting. More videos on related topics like IRR and WACC in this playlist: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
So if you can see your future net value generated in today’s fund. What does it mean ?? That we will make the same as we invested plus the discount percentage more?
Sorry, that's a completely different topic than what I am covering here. Net Present Value is calculated when for example companies decide whether or not to invest in a new production line. Your question is about returns on investment funds, and I do not know the answer to your question.
You're welcome! Please spread the word to friends and colleagues. To really grasp NPV and IRR, please around with some numbers in a spreadsheet, and you'll get the feel for it! th-cam.com/video/jQ_NDQ2qVVA/w-d-xo.html and th-cam.com/video/L0JCg5TXudc/w-d-xo.html
@@Soft_girl_diary The 1 is used for "calibration".... if you divide any number by 1, it stays the same. For example the name Anunobi has 7 letters. If you divide 7 by 1, then the outcome stays 7. If you divide 7 by a number higher than 1, then the outcome becomes less than 7. If you divide 7 by a number lower than 1, then the outcome becomes bigger than 7. For example 7 divided by 0.5 is 14.
Great to hear! If you want to learn about related topics like IRR and WACC as well, then this playlist is for you: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Can't this example be simplified ? When I invest 1000 $ at 20 % return , i would get X amount in 4 years. If X is smaller than the sum of yearly returns ( 400 X 4 ) , then the investment is good. Am I over simplifying it ?
You are talking about something different: the future value of one single amount. The example in my NPV video is about situations like investing in solar panels and getting annual benefits from that, or investing in a machine in the factory which generates recurring annual savings on labor cost. My NPV example has an upfront investment, and then 4 years of equal annual benefits spread out over time, which you somehow want to compare by bringing all the amounts back to their present value equivalent.
In this video, I just assumed 20% to make the example as simple as possible. For full discussion of WACC, see this related video: th-cam.com/video/1O-DbtVueMw/w-d-xo.html
A firm needs component in an assembly operation. If it wants to do the manufacturing itself, it would need to buy a machine for Rs. 400,000 which will last for 4years with no salvage value. Manufacturing costs in each of the 4 years would be Rs. 600,000, Rs. 700,000, Rs. 800,000, and Rs. 1 million respectively. If the firm had to buy the components from a supplier, the cost would be Rs. 0.9 million, Rs. 1 million, Rs. 1.1 million and Rs. 1.4 million respectively in each of the four years. However, the machine would occupy floor space which would have been used for another machine. This latter machine would be hired at no cost to manufacture an item, the sale of which would produce net cashflows in each of the four years of Rs. 0.2 million. It is impossible to find room for both the machines and there are no other external effects. The cost of capital is 10% and the present value factor for each of the four years is 0.909, 0.826, 0.751 and 0.683 respectively. Should the firm make the components or buy from outside? What will be the solution?
Because the present values are how much each future payment is worth in today's terms, at the time of the investment. Notice that the present value of each future payment decreases the farther into the future the payment is.
In the example, I assume a 20% discount rate. 20% = 20 divided by 100 = 0.2. To calculate future value, multiply by 1.2. To calculate present value, divide by 1.2.
Hi! The $100 starting value represents 100%. The expected annual return is 20%, which is the same in decimal notation as 0.2. Basically, multiplying by 1.2 is the same as saying that you are going to 120% of the original amount. Does that help?
In exam project A and project b. They have given from project 0 , i have calculated from project o and it is for 12 mark , will they give o marks for that plz reply.
Case study The firm SCHOB Ltd. produces automobile parts on a technologically old manufacturing facility which needs to be replaced by a new production line. According to the information collected on the recent trade fair SCHOB can alternatively invest into two different pro-duction lines. Both of them have a purchase price of 300 TEUR. The firm has a planning horizon of 4 business years. At the first year for both production lines the firm calculates wages and salaries of 400 TEUR which are expected to rise by 5 TEUR each year. The firm calculates payments for materials of 80 TEUR which are rising by 5 TEUR each year due to inflation. Payments for energy are calculated for production line 1 (2) at 120 (140) TEUR which are increasing to 150 (170) TEUR in the second and third year and 160 (180) TEUR in the fourth year due to a new law. Bigger repairs are not expected. SCHOB anticipates revenues of 780, 750, 750 (790) and 700 (740) TEUR over the investment horizon for the two alternative production lines. The uniform capital market rate is 10%. a) Determine the relevant cash flows for the two investment projects! b) Calculate Net Present Values! What is your investment decision? c) What is the Net Present Value of the alternative capital market investment? Can you please solve this?
@@TheFinanceStoryteller Actually I tried it 3 times and it's not my assignment. I am preparing for my exams. It would be really helpful if you could solve it for me and moreover I really like and appreciate for your teaching. Thanks and all the best
Hi! Add up the discounted benefits $333 + $278 + $231 + $193 and then deduct the upfront investment of $1000, that gets you to NPV of $35. My apologies if that was not clear in the video.
Thanks for the compliment, Chris! Feel free to join the (paid) membership on the channel: th-cam.com/channels/QQJnyU8fALcOqqpyyIN4sg.htmljoin or hit the "Thanks" button below the video for the tip jar. 😉
Just another thought.... Some people start understanding concepts like NPV and IRR by having a clear definition and explanation, others learn by doing. If you want to play around with the calculations in Excel, then here's the way to do it: th-cam.com/video/jQ_NDQ2qVVA/w-d-xo.html
@@only1brum Be careful with the NPV formula in Excel. It's structured a bit different from what you might intuitively expect. For example, I would use the following formula to calculate Net Present Value.... =B2+NPV(B3;C2:F2) with B2 referring to the initial investment, B3 referring to the discount rate or WACC, and C2 through F2 to the nominal benefits in years 1 through 4.
Glad it was helpful! Thank you for watching and commenting. I have a few more videos for you that could be of interest on related terms like payback, IRR and WACC: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Enjoyed this video? Then please subscribe to the channel, and let's review what WACC means and how WACC is calculated: th-cam.com/video/1O-DbtVueMw/w-d-xo.html
1.2 came from?
@@madonnasanjose2777 For illustration purposes, I chose a dramatically high 20% as the discount rate. So 1 + 20% = 1.2.
@@madonnasanjose2777 100 rupee today 20% interest for 1 year
next year the value would be 100 + 20% of 100 = 120
or simply 100 * 1.2 = 120
if future value is 120 the the initial value is x (assume)
so x + 20 % of x = 120
x + 20x/100 = 120
1.2x = 120
x = 100
now you understand meaning of 1.2?
@@avronilbanerjee5302 thnx bro
how did you get 1.2, if you divide 20% by a hundred it is 0.2.
I legit almost cried when I did the calc on a project and came up with the right answer after watching this! THANK YOU!!!!
Well done!!!! Happy to help. Related concepts in this playlist: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html&pp=gAQBiAQB
I legit almost orgasmed over my whole project and my friend sitting behind it.
Thank you so much for these videos!
This is why teachers over the world are in such a noble profession. When you take any concept and explain it in such detail but with such ease of understanding - it is such a beautiful thing.
Thank you very much for the kind words. 😊 Have a look at the related video on IRR as well, I think you will enjoy that too: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Best simple explanation of a concept so many professors over-complicate. Thank you!
Glad it was helpful, Sully! Check out my videos on IRR and WACC as well in this playlist: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Ive been studying economics, business and finance for 5 years since i was in high school till now and ive had many teachers teach me this. But the way i understood it now more then ever in 5 minutes is crazy
Thank you for the kind words! Please share the video/channel with friends and colleagues. Have a look at the related videos on IRR and WACC as well: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html&pp=gAQBiAQB
Re-watching 4 hours of lectures only to find this. Explains FV, PV and NPV so much better within 5 minutes!!! LIFESAVER
Happy to help, Sammie! Here's the link to my playlist covering the related concepts IRR, WACC, profitability index, etc. as well: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
@@TheFinanceStoryteller Thank you! have saved all of your playlist to my library :)
@@sammiemoeke-campbell6498 Please spread the word to anyone that might benefit from it. :-)
After watching two videos the whole night, the following morning I decided to revisit this NPV & I came across your video, OMG easiest explanation ever!!!!🥰
Wonderful to hear that! Thank you for the kind words. I have videos on related topics like IRR as well for you: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html&pp=gAQBiAQB
THANK YOU. I struggled with this in college. I struggled the first time I took my licensing exams. I'm struggling again the second time I'm taking them. I understand it now!!
Happy to help, Rachel!!! Related videos on IRR, WACC etc. in this playlist: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
You don't fool me, Mr. S Connery. I know it's you, back there
Aye!
i know you have heard/read this kind of comment before, but you made a complex finance so easy. Thank you!!
I never get tired of hearing that!!! Happy to help.
_This is _*_the best_*_ explanation of FV PV NPV_
_I have seen on TH-cam._ TᕼᗩᑎK YOᑌ
Wonderful! Thanks for watching. Good to hear from you.
Thank you sir! I struggle a lot to get how this magic works, and you make it much easier
Happy to help! More good stuff in the NPV IRR WACC playlist covering a lot of related topics: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html&pp=gAQBiAQB
The best explanation I've ever had. Many thanks
Wow, thanks! Nice to hear that, Hasnaa! Here's a link to the playlist covering related concepts (IRR, payback, crossover rate, WACC): th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Wow! NPV explained in a very easy to understand manner. Thank you!
Happy to help! Thank you for watching and commenting.
Life-saving explanation just before exam!
Just in time!!! Hope the exam went well.
@@TheFinanceStoryteller Of course! Got a question on IRR and thanks to your video on IRR, I got it right.
Thank you, I just spent 2 hours replaying a lecture recording from Queensland University of Technology in Australia and couldn't understand this simple concept. I watched your 5min video once and I now understand it. SOMEBODY PLS EXPLAIN TO ME WHY UNIVERSITY STILL EXISTS.
Wow, I am so sorry to hear that the quality of that lecture was so poor. Here's a link to my playlist covering related topics IRR, WACC, etc., as they are probably up next for you to study: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
If you want to ask the university for a refund, and then send the money to me, you are more than welcome. 😎 th-cam.com/channels/QQJnyU8fALcOqqpyyIN4sg.htmljoin
Soo usefull for my PMP learning!!! Very well explained, thank you!
Great! Thanks for the feedback. :-)
Did u pass? I’m taking mine in nov2020
very very well explained in a simple way only take 5 minutes to understand great
Thank you for the kind words! I have done the same for related concepts like IRR and WACC in this playlist: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
i did a course from University of pennsylvania which had way worse explanation than this
This is Precise and clear !!!
Thank you, Kunal! Please share the link to the video/channel with fellow students, and have a look at my videos on IRR and WACC as well: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Omg, you have explained the simplest way! Thank you
Happy to hear that, Kimi!!!
I've understood all. I'm really grateful for your video.
Excellent! Here's the link to the playlist that might be useful for you as well, explaining related concepts like IRR and WACC th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
GREAT VIDEO. So much better explanation than text book.
Happy to hear that, Mike!!!! Have a look at my videos about IRR, WACC, etcetera as well. 😎
@@TheFinanceStoryteller oh yes. I put it on my calendar to watch them today. Went over WACC last chapter of the text book, it's still a little fuzzy.
Yeah, WACC is a questionable concept. Extrapolating from past averages, whereas the future often does not resemble the past at all. Anyway, I discuss the concept as well as my frustrations with it in this video: th-cam.com/video/1O-DbtVueMw/w-d-xo.html The heuristic-based (rule of thumb) hurdle rate is less pretentious and far easier to understand: th-cam.com/video/8EyFLdOTuHU/w-d-xo.html
You explained this perfectly! Thank you!
Glad it was helpful, Evan! I have videos on related topics like IRR and WACC as well for you: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
You made it so intuitive. Thank you
So happy to hear that! Related concepts, and examples of how to calculate in Excel in this playlist: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html&pp=gAQB
Wtf? This was so easy and very well explained.
Thank you, Ludwig! More videos on related topics (IRR, WACC, etc.) in this playlist: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Great! amazingly simple and clear explanation !
Many thanks! Here's the link to a playlist with related concepts like IRR and WACC th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
So easy to understand bro! Thanks tons. It was perfect, you just give the elemental theory and move on to the hands-on part, where we really struggle haha
Awesome, thank you, Marlon!
very simplistic and effective explanation!! loved it
Happy to hear that! I have videos on WACC, IRR and other related concepts as well: th-cam.com/play/PLKbmcnUUQMlkkCqQs7M_b6ktTDLITcRoG.html
Really good explanation! Thanks for your videos!
Thanks for the feedback. Thank you for watching!
Wow.. Awesome.
Really helpful
Thanks man
You're welcome, Dinesh! Happy to help. :-)
Good video. I suck at maths and even I understood this easily.
Excellent! Happy to hear that, Ian! Thank you for watching and commenting.
Crystal clear!
Thank you, Aaron! More videos on NPV-IRR-WACC and related concepts in this playlist: th-cam.com/video/1O-DbtVueMw/w-d-xo.html
I am now more confused. I don't understand the concept. I see numbers that yield a return but if you follow the graph far enough they do not. Help.
Hello! Let's take it step by step. Have a look at the time value of money video first th-cam.com/video/gkp-7yhfreg/w-d-xo.html and make sure you thoroughly understand the concepts of future value and present value. Once that is the case, move to Net Present Value. For some people, playing around with NPV in Excel makes them understand it better than going through a theoretical discussion, you could try that as well: th-cam.com/video/jQ_NDQ2qVVA/w-d-xo.html
At 5:06 in the video you show a weird E type symbol. What exactly does that mean? Can you translate that symbol and letters into the numbers used in your example? Please help. Thank you
Hello Joe! That's the mathematical symbol for "sum", indicated by a letter of the Greek alphabet, called the "uppercase sigma". It means you need to sum the present values of the future cash flows for all the years that are in scope for the project. Earlier in the video, I was showing an example of a project where you invest today in return for benefits during the next 4 years. The mathematical formula makes it more generic, so you can apply the NPV concept to projects of 3 years, or 10 years, or 20 years, etc.
Helped a lot man thank you
Glad to hear it 🙂
Npv is the difference of cash outflow today for starting up the project and the present value of all the cash inflow that project generate💚
Npv= investment - present value of cash inflow.
First part is correctly stated. The correct formula is Npv = present value of future cash inflows - investment. This way if PV>inv, then it is a positive number. If PV
this channel is insane
Insane in a good way, I hope! 😉
@@TheFinanceStoryteller absolutely
Thanks sir. I m doing PM in my BCS studies.
You're welcome! Wishing you all the best in your studies, hope you find several videos that are of use to you on this channel.
Dude, you're a god. thank you
You're welcome!!! I have some more videos for you on related topics like IRR, WACC etc.: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Fantastic video
Thanks! 😃 Have a look at the related videos on IRR and WACC as well, those might help you too: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html&pp=gAQBiAQB
ij nootist det yoe hev ee verrie Dutch eksent, so ij asyoem det yoe ar Dutch hahaha 🤪
Thank you very much for the clear explanation. You really helped me 🙏🏾
Yoe nootist iet korrektly! 😎
Happy to hear it was helpful anyway! Did you check out the related videos on IRR and WACC as well: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Such an amazing straight forward video godbless you sir
Happy to hear that & thank you! 🙂
Very Well Explained, Thank you Sir
Happy to help! Enjoy using it.
Thank you for the explanation.
My pleasure!!! Please share with colleagues and friends.
So simple...thanks man😉
Thank you, Alex! Yeah, once you get it, it is very simple. 😎
Thank you for this
My pleasure, Catalin! Related concepts like IRR and WACC are discussed in this playlist: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html&pp=gAQBiAQB
Feel free to connect on Linked In!
Best explanation thank you so much👍🏻👍🏻
Glad it was helpful! Related concepts in this playlist: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Thank you so much for the clear and simple explanation. Do you have a video for Ag and Pg?
Thank you for the kind words. Glad you enjoyed it. The terms Ag and Pg are not ringing a bell, can you clarify what you are looking for?
Great explanation
Glad you liked it, Noureldin! More on related topics like IRR and WACC in this playlist: th-cam.com/video/N-lN5xORIwc/w-d-xo.html
That was good explanation. Thank you
Glad it was helpful, Sakinatul!
Superb explanation thanks
Glad you liked it!!! 🙂
Superb Explanation👌👌
Thank you 🙂 I have videos on related concepts like IRR and WACC as well for you: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
So the difference between NPV AND PV is that NPV is basically the net ammount of costs and return profit from mutliple years and PV is just the ammount invested at the start? Also I dont really understand your slogan saying time is money. I get it obviously but not how it applies to NPV. Were calculating the costs so we can see if we make profit by investing into this company. But what does time have to do with it? It's just about the cost and profit ammounts no?
Have a look at my "time value of money" video th-cam.com/video/gkp-7yhfreg/w-d-xo.html It will answer most of your questions.
In these investment calculations, we compare the investment (today, cash outflow) to future benefits (cash inflows). In using the term PV, I can refer to a single amount that is "translated" from the future to today, or multiple amounts. In using the term NPV, I deduct the investment amount from the present values of the future benefits. So "net" refers to net of the investment.
Thank you!
You're welcome!
Such a saviour video thank you ❤
Great to hear that, Shivani! Have a look at the related videos on IRR and WACC as well: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Thank you 👍
Happy to help!
Hello! I have a more complex question. In theory, if markets are efficient, the net present value of investing in any stock (no matter what is the risk of the stock/ rate of return/ discount rate) should be equal to zero. That means if markets are efficient, investing to stocks leaves no profit? It doesn't make sense in my head. Can you please explain it to me? Let's say I invest 100$ and I make 20$ in one year. I actually made 20$ profit cash. How is the NPV=0?
Hello Konstantinos. Yeah, that's one of those very far-fetched propositions, that is very far removed from real life. It took me a while to think through this. Here's what I came up with (I can explain the steps, but don't agree with this view of the world). I guess that the core idea of efficient markets, is the assumption that all available information has been taken into account when pricing assets, therefore there is no room to make superior returns or beat the market. It doesn't mean that you cannot make any profit at all (on a "nominal" level like in your example), just that the profit levels are fairly representing the risk level.
An example would be:
Project A requires $1000 of investment (in year 0), gives you 4 times $400 benefits in the next years (years 1 through 4), at a discount rate of nearly 22% that indicates a very high risk level, therefore NPV = 0. See also my video on IRR in Excel: th-cam.com/video/L0JCg5TXudc/w-d-xo.html Your nominal benefits are $600 (= $1600 minus $1000), but risk-adjusted and time-adjusted through WACC and NPV the returns "are zero".
Project B requires $1000 of investment, gives only 4 times $300 benefits in the next years, at a discount rate of nearly 8% that indicates a much more modest risk level, therefore NPV = 0. This time, nominal benefits are only $200 but at a much lower risk profile.
This line of reasoning argues that project A and B are equally attractive.
Instead of the above, take a look at the works of Nassim Taleb. He argues that the world is much more powerlaw driven than Gaussian (standard deviation driven). What is essential is to recognize fragile - robust - antifragile, rather than to forecast.
Hope this helps!
@@TheFinanceStoryteller Awesome, thank you!
Please spread the word to friends and colleagues. Eager to get 200,000 subscribers, possibly by the end of this year!!!
Really liked this video
Nice to hear that, Vincent! I have related videos on IRR, WACC, payback, etc. as well.
legend, thanks !!
😎 Have you checked out the related videos on IRR and WACC as well?
il take a look, thank you@@TheFinanceStoryteller
Is the WACC the discounted factor?
Yes, most people use WACC as a synonym for discount factor. You could also use the hurdle rate as the discount factor, which is explained in this video: th-cam.com/video/8EyFLdOTuHU/w-d-xo.html In-depth discussion of the pseudo-scientific WACC over here: th-cam.com/video/1O-DbtVueMw/w-d-xo.html
Is something wrong with that? If I deposit $1,000 with 20% interest rate I would have 2073 after 4 years. This investment will give me only 1600 after 4 years. So why is it worth?
It's not the same thing. What you are talking about is two cash flows: $1000 outflow now, and one lump sum / bullet payment cash inflow at the end of the 4 years. My example has five cash flows: $1000 outflow now, and then every year 1 through 4 $400 of cash inflow. Timing is different.
Hi i would like to ask, how many years do you calculate? And do we need terminal value? Using this calculations all of the stock price valuations will not come close to what we call a positive value. Thank you for explaining.
Hello! For the example in this video, just 4 years of savings/benefit for the CapEx project. For stock price valuation, usually 10 years' horizon plus a terminal value. And I agree, at current valuations of some shares, it is hard to "justify" the current share prices based on DCF. Check my video on WACC as well: th-cam.com/video/1O-DbtVueMw/w-d-xo.html
Thanks! It really helps :)
Great to hear that! Thank you for watching and commenting. More videos on related topics like IRR and WACC in this playlist: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Thank you
You're welcome, Simon!
So if you can see your future net value generated in today’s fund. What does it mean ?? That we will make the same as we invested plus the discount percentage more?
Sorry, that's a completely different topic than what I am covering here. Net Present Value is calculated when for example companies decide whether or not to invest in a new production line. Your question is about returns on investment funds, and I do not know the answer to your question.
hi do u get 1.2 from 1 + 20/100? thx in advance
Hi Nikolas! 20/100 = 0.2 and 0.2 + 1 = 1.2
@@TheFinanceStoryteller yesss, thank you for answering! keep up the good work
You're welcome! Please spread the word to friends and colleagues. To really grasp NPV and IRR, please around with some numbers in a spreadsheet, and you'll get the feel for it! th-cam.com/video/jQ_NDQ2qVVA/w-d-xo.html and th-cam.com/video/L0JCg5TXudc/w-d-xo.html
@@TheFinanceStoryteller please where is the 1 from
@@Soft_girl_diary The 1 is used for "calibration".... if you divide any number by 1, it stays the same. For example the name Anunobi has 7 letters. If you divide 7 by 1, then the outcome stays 7. If you divide 7 by a number higher than 1, then the outcome becomes less than 7. If you divide 7 by a number lower than 1, then the outcome becomes bigger than 7. For example 7 divided by 0.5 is 14.
It helped. Thanku
Great to hear! If you want to learn about related topics like IRR and WACC as well, then this playlist is for you: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
thanks
Can't this example be simplified ? When I invest 1000 $ at 20 % return , i would get X amount in 4 years.
If X is smaller than the sum of yearly returns ( 400 X 4 ) , then the investment is good.
Am I over simplifying it ?
You are talking about something different: the future value of one single amount.
The example in my NPV video is about situations like investing in solar panels and getting annual benefits from that, or investing in a machine in the factory which generates recurring annual savings on labor cost. My NPV example has an upfront investment, and then 4 years of equal annual benefits spread out over time, which you somehow want to compare by bringing all the amounts back to their present value equivalent.
How did you find the WACC!
In this video, I just assumed 20% to make the example as simple as possible. For full discussion of WACC, see this related video: th-cam.com/video/1O-DbtVueMw/w-d-xo.html
That was awesome
Thank you, Joshua!
Can you do NPV calculation without an initial investment?
That would be called a present value calculation.... the "net" part of NPV is about deducting the initial investment.
how do you know the WACC
I just assume the 20% for illustrative purposes in this video. More on how to derive the WACC in this video: th-cam.com/video/1O-DbtVueMw/w-d-xo.html
A firm needs component in an assembly operation. If it wants to do the manufacturing itself, it would need to buy a machine for Rs. 400,000 which will last for 4years with no salvage value. Manufacturing costs in each of the 4 years would be Rs. 600,000, Rs. 700,000, Rs. 800,000, and Rs. 1 million respectively. If the firm had to buy the components from a supplier, the cost would be Rs. 0.9 million, Rs. 1 million, Rs. 1.1 million and Rs. 1.4 million respectively in each of the four years. However, the machine would occupy floor space which would have been used for another machine. This latter machine would be hired at no cost to manufacture an item, the sale of which would produce net cashflows in each of the four years of Rs. 0.2 million. It is impossible to find room for both the machines and there are no other external effects. The cost of capital is 10% and the present value factor for each of the four years is 0.909, 0.826, 0.751 and 0.683 respectively.
Should the firm make the components or buy from outside?
What will be the solution?
TLDR. I am not solving your homework questions for you, as you will learn a lot more by thinking through this yourself.
why did you multiply 100 $ by 1.2 ? why 1.2?
I am using a 20% discount rate in the example. 1 + 20% = 1 + 0.2 = 1.2.
Why are you dividing by 1.2???
To get from future value to current value, assuming the WACC or the expected returns are 20%. In other words 1 + 20% = 1.2
I don’t get it. Isn’t a dollar now worth more than a dollar in the future? If so, then why are the present values worth less?
Because the present values are how much each future payment is worth in today's terms, at the time of the investment. Notice that the present value of each future payment decreases the farther into the future the payment is.
Correct, Jerry! Maybe watching the "time value of money" video will help as well th-cam.com/video/gkp-7yhfreg/w-d-xo.html
How do u get the 1.2?
In the example, I assume a 20% discount rate. 20% = 20 divided by 100 = 0.2. To calculate future value, multiply by 1.2. To calculate present value, divide by 1.2.
why are they multiplying it by 1.2 at 0:34 ? Xxx
Hi! The $100 starting value represents 100%. The expected annual return is 20%, which is the same in decimal notation as 0.2. Basically, multiplying by 1.2 is the same as saying that you are going to 120% of the original amount. Does that help?
@@TheFinanceStorytelleryes it does. Thanks so much 🙏🏾
Happy to help!
And I will subscribe your channel 👍👍👍
Much appreciated!!! Please spread the word to fellow students, friends, colleagues....
Thanks!
You're welcome, Adrian!
In exam project A and project b. They have given from project 0 , i have calculated from project o and it is for 12 mark , will they give o marks for that plz reply.
I am sorry, but have no idea about that. I don't design exams, nor grade them. Ask your teacher.
Bro, you are absolutely AWESOME! May I know your name please?
Thanks for the kind words, Sonu! My name is Philip, and I live in the Netherlands.
@@TheFinanceStoryteller all thanks to you, dear Philip, because of you, the human capital of India has increased 🙏 I'll always be grateful to you.
Please spread the word! :-)
@@TheFinanceStoryteller sure, I will 👍👍
Still confused on how you found 1.2 there in the beginning??
Explain clearly please 🥺
Hi there! It's just an example... I assume there is a 20% expected annual return on an investment. 20% is the same as 0.2. So 1 + 20% = 1 + 0.2 = 1.2.
@@TheFinanceStoryteller Okay got it now! Thank you very much 😊
Great to hear that! Wishing you lots of success in your studies. Let me know if you need any more clarification of any of the videos.
Case study The firm SCHOB Ltd. produces automobile parts on a technologically old manufacturing facility which needs to be replaced by a new production line. According to the information collected on the recent trade fair SCHOB can alternatively invest into two different pro-duction lines. Both of them have a purchase price of 300 TEUR. The firm has a planning horizon of 4 business years. At the first year for both production lines the firm calculates wages and salaries of 400 TEUR which are expected to rise by 5 TEUR each year. The firm calculates payments for materials of 80 TEUR which are rising by 5 TEUR each year due to inflation. Payments for energy are calculated for production line 1 (2) at 120 (140) TEUR which are increasing to 150 (170) TEUR in the second and third year and 160 (180) TEUR in the fourth year due to a new law. Bigger repairs are not expected. SCHOB anticipates revenues of 780, 750, 750 (790) and 700 (740) TEUR over the investment horizon for the two alternative production lines. The uniform capital market rate is 10%. a) Determine the relevant cash flows for the two investment projects! b) Calculate Net Present Values! What is your investment decision? c) What is the Net Present Value of the alternative capital market investment?
Can you please solve this?
I could probably solve it, if I wanted to. But I think you will learn a lot more if you do your homework yourself.
@@TheFinanceStoryteller Actually I tried it 3 times and it's not my assignment. I am preparing for my exams. It would be really helpful if you could solve it for me and moreover I really like and appreciate for your teaching.
Thanks and all the best
I'm sorry, but I am not in the business of personal tutoring. I have videos to make. Why don't you work on this together with other students?
Hey do at least two videos in a month.
Working on it! Just got back from summer holiday, picking up the pace.
why 1.2?
It's an example. 1.2 gives more dramatic discount effects than 1.1
Why 1.2 🤦🏾♂️
Because I came up with a 20% discount rate for the example. 20% is the same as 0.2. So if I divide by 1 + discount rate, it's 1 + 20% = 1 +0.2 = 1.2.
can any one please explain hoe NVP is 35$
Hi! Add up the discounted benefits $333 + $278 + $231 + $193 and then deduct the upfront investment of $1000, that gets you to NPV of $35. My apologies if that was not clear in the video.
@@TheFinanceStoryteller thank you so much iam a CFA level 1 asperent and the day i found ur channel it had given me confidence
Just what I was looking for. Complex idea explained clearly in 5 min with an example I could replicate. Thank you so much!!
Wonderful to hear that! I use the same example in discussing IRR, payback period, etc.: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Great explanation
Happy to help!
You could replace my glorified assignment graders, I'd rather pay you the thousands of dollars.
Thanks for the compliment, Chris! Feel free to join the (paid) membership on the channel: th-cam.com/channels/QQJnyU8fALcOqqpyyIN4sg.htmljoin or hit the "Thanks" button below the video for the tip jar. 😉
You are the first person, out of many, to simplify this for me. I cannot thank you enough!!!!!
I am so happy to hear that!!!! Check out the related videos as well on IRR and WACC on this channel. ;-)
@@TheFinanceStoryteller I will do, thank you!
Just another thought.... Some people start understanding concepts like NPV and IRR by having a clear definition and explanation, others learn by doing. If you want to play around with the calculations in Excel, then here's the way to do it: th-cam.com/video/jQ_NDQ2qVVA/w-d-xo.html
@@TheFinanceStoryteller That is perfect, as I need to use Excel for my assignment. I really appreciate your help.
ENORMOUS thumbs up 👍
@@only1brum Be careful with the NPV formula in Excel. It's structured a bit different from what you might intuitively expect. For example, I would use the following formula to calculate Net Present Value.... =B2+NPV(B3;C2:F2) with B2 referring to the initial investment, B3 referring to the discount rate or WACC, and C2 through F2 to the nominal benefits in years 1 through 4.
A complex finance idea made so simple and easy to do. Thank you!
Glad it was helpful! Thank you for watching and commenting. I have a few more videos for you that could be of interest on related terms like payback, IRR and WACC: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html
Great vid thank you😁
You're welcome! :-)
Clear, concise, succinct and intuitive. Thanks a ton for the video. Liked & subscribed.
Thank you very much for the kind words! Related videos on IRR, WACC, etc in this playlist: th-cam.com/video/aS8XHZ6NM3U/w-d-xo.html&pp=gAQBiAQB
Ah, so FV(PV) is just the same as Return getting Principle.
Familiar, but different names.
Thank you very much, it helps me a lot during this pandemic (online class)
Great to hear that! You're welcome! :-)
Why does *100 x 1.25 = 125*
but
*100 / 1.25 = 80???*
Try it on your calculator, and see what comes out. I can't change the math on that. Play around with it a little:
125 / 1.25 = 100
80 * 1.25 = 100
It is great explanation. By the way if you made a video of how to calculate mandelbrot fractals it would really be incredible
I am a big admirer of Mandelbrot, but don't have the mathematical skills to make a video of how to calculate mandelbrot fractals.