After the Calculation for Total costs and savings, there's s an important note saying it should not be based on NPV. I didn't even remember to do that, but would like to understand why it would not be appropriate to do so in this case? Can anyone elaborate on it, please?
Thank you in advance!
Hey !
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.
BASIC STRUCTURE
Formula
Definition
Example
EXPLANATION
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 :
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".
Upvote if you find it helpful ;)
(editiert)
Hi there,
A few key tips:
You should use NPV when:
You should not use NPV when:
The reason? They don't expect you to do the crazy math that NPV requires further than to the power of 2/3.
In this case specifically, 15 years is an insane calculation that no-one could do by hand! As such, you can apply a flat rate.
Hope this helps!
