© 2011 Sixhills Consulting LtdKey Principle: Time-Value of Money and DiscountingNPV (Net Present Value) gives an understanding of the effect of time on an investment (‘time-value of money’). Discounting is the fundamental concept that supports this. It reflects the fact that receiving money today is more valuable than in the future. £100 received today could be worth £110.25 in two years (invested at 5%), whereas the value of £100 received in two years is worth only £90.70 nowr = interest rate (5% for this example)Future valueCurrent cash in year n= Cash x (1+ r)n = £110.25£100£105£110.25Today1 Year2 Year100100 x (1 + r)100 x (1 + r)2Example – 1Consider putting £100 in the bank today at 5%p.a. interest ratePresent valueof cash inyear n£90.70£95.24£100Today1 Year2 YearTurning this around, how much would we need to invest now to get £100 in 2 years timeExample – 2100 1 + r100100 (1 + r)2= Cash x1(1+ r)n= £90.70P5IT Commercial Skills Development - Part 1
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