Let's be efficient, cases are easy with a structure!
GENERAL RULES: First calculate any future cash flow without considering the Present Value (PV) or Net Present Value (NPV). Then if you have time calculate the NPV of the future cash flow to be more accurate.
- Profit = Revenu - Cost
- Net Present Value (NPV) = Present Value - Investment
- A Cash Flow is an amount of money you are going to get in the future (Future Value or FV)
- The Present Value (PV) of a Cash Flow (CF) is his Future Value discounted by a discount rate R. We call that "discounted the cash flow".
- The PV of a CF is the amount of money we need to put at a bank today with an interest rate R to get the same amount of money of the futur CF.
- Past revenu : historical revenu result
- Futur revenu : revenu projected, revenu through market sizing you can get in 1 year
The revenu is a cash flow you are going to receive in the future.
So in theory if you calculate any revenu who is going to come in the future you should :
- Calculate this revenu - so his futur value
- Calculate the present revenu or "discount it" - change the futur into present value
But, in reality of cases, any "futur revenu" are considered as "revenu". It's a vocabulary simplification. And we don't calcule "the present revenue value" or don't discount it. So consequently we don't calculate the NPV.
We do this to save analysis time. That's why they suggest you "you should not be based on NPV".
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