Eli5: What is NPV (Net Present Value) in the most simplest terms? I have a non-finance background
In: 5
What should this be worth to you RIGHT NOW. That is what NPV is. “This” could be an investment, loan, purchase etc.
The key fundamental concept is TVM – Time Value of Money. A dollar today is worth more than a dollar tomorrow because you can invest that dollar and earn something on it by tomorrow.
Using NPV, the idea is to value any activity in terms of today’s dollar. So they can be easily compared. The hyperbolic way to think of it is “would you prefer to be given $1,000 today or $10,000,000,000 in 200 years”. Since you’re almost certainly dead in 200 years, the rational answer would be $1,000 today even though $10,000,000,000 is a lot more money. That $1,000 now is more valuable to you and that is the idea behind NPV.
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