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Present
Value
The discounted value of the cashflow Used in capital budgeting and By discounting the value of future
associated with the project investment planning to analyse cashflow, NPV reflects on the time
whether the project or investment value of money
profitable for the company
CONSTRUCTION
Step 1
Need to calculate the present value of future cashflows
Step 2
Deduct the present value with the initial investment
Step 3
Make decision based on the net present value rule
NPV > 0, investment or project adds value to the
company
NPV < 0, investment or project subtract value to the
company
NPV = 0, investment or project doesn't adds or subtract
value to the company
CASE STUDY
NETFLIX
NETFLIX Established in 2007 Netflix is currently the world's leading
subscription streaming entertainment services
With the initial investment is $50,000,000 for the new division and the discount rate is 8%, if we were to calculate the
NPV for the next 5 years it would be as follows
Therefore, the total NPV is $27,434.28 which means that the investment for the new division adds value to the company
CONSIDERATION
AND PROBLEMS
• There's a possibility of the company to have limited funds but
with various proposal
• Need to factor other cost (i.e. opportunity cost)
• Accuracy of future cashflow projection
• Every project competes with itself at delayed time
• Uncertainty of the interest rate
REFERENCE
Farris, P., Bendle, N., Pfeifer, P. E., & Reibstein, D. J. (2016). Marketing metrics: The
manager's guide to measuring marketing performance (3rd ed.). Upper Saddle
River, NJ: Pearson.