Imagine you have a great idea for a new business, like starting a bakery. You need to know if this is a smart financial move. That's where Net Present Value, or NPV, comes in.
What Is NPV?
NPV is a simple way to figure out if your bakery idea will make you more money than it costs. It's like comparing what you spend today to what you'll earn in the future.
The trick is that money you get in the future isn't worth as much as money you have right now. A hundred dollars today is more valuable than a hundred dollars a year from now because you could invest that money and earn more. NPV takes this into account by using a discount rate to adjust future earnings to today's value.
How to Use It
You add up all the money you expect to earn from the bakery over time.
Then, you subtract the initial cost of starting the business (the ovens, ingredients, rent, etc.).
The final number you get is the NPV.
What the Numbers Mean
If the NPV is positive (a number greater than zero), your idea is a good one. It means your future earnings are worth more than the cost to start. Go for it!
If the NPV is negative (less than zero), your idea isn't worth it. You'll likely lose money. You should probably skip this project.
If the NPV is zero, you'll break even. You won't gain or lose money, so you might consider other, more profitable ideas.
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