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How to Net Present Value?
What is 100K worth today when you receive it in 10 years?
The answer depends on the percentage you apply to cover interest rates and opportunity costs.
Most makers understand how to apply the Power() function to deal with interest rates and understand how much they need to be pay when you take a mortgage. I wrote a blog about it and I published a doc .
Kids learn this calculations already in secondary school and have to use a spreadsheet to make it work, often Excel by the way. In the calculation of loan is rather straightforward as is the Net Present Value formula.
Formulas required to calculate the Interest to pay and NPV formulas are similar and each other’s reflection.
Product(Power(1 + thisRow.percentage,thisRow.years),thisRow.amount)
Quotient(thisRow.amount,Sum(1,thisRow.percentage).Power(thisRow.years))This is a simplification of how the NPV often is used.
The idea is that you guestimate the percentage per period you have to apply. In an NVP the percentage is the (opportunity) costs you assume. In the first example each year has the same percentage and that makes it easy. When you close a mortgage in most cases you get a rate for a certain period. Each contract tells how much to pay…
