Audio Visual transcript: NPV method
Section 1
satisfying to this short tutorial on management accounting. In this tutorial you will learn about the accounting concept called the cabbage Present Value (or NPV) method of investment appraisal.
Section 2
in the first place we can consider NPV, we need to look at 2 concepts, namely, compounding and discounting. We will consider compounding first. Suppose you insufficiency to deposit £1,000 now in a bank account and the bank interest rate is 5%. How much would you wait to have in your account in five long time time?
Would you expect to have (1) less than £1,000, (2) £1,000 or (3) to a greater extent(prenominal) than £1,000?
Section 3
Assuming that you didnt take any of your bullion out of the bank, you would expect your deposit to grow and to have more than £1,000. This is because of the effect of compound interest.
Compound interest (or compounding) means that 5% interest (£50) will be added to the £1,000 at the end of form 1, to give you £1,050, and then a further 5% (£52.50) to be added to the £1,050 at the end of year 2, to give you £1,102.50 (or £1,103 to the nearest intact pound) at the end of year 2.
A similar act would be followed for years 3, 4 and 5.
Section 4
This shows the compounding effect.
The care for of capital changes over time, because (in this case) of the impact of interest.
This concept is known as the time value of money. This means that the worth or get power of money changes with time. (You can check these figures for yourself, using your calculator.)
We see, then, that invested money grows over time because of the effect of the compound interest. There is a construction for compounding, which well now look at.
Section 5
The compounding formula is S = P multiplied by (1+r) to the power n. This at first looks rather daunting, but it is not when you have unpacked what the symbols and numbers mean.
S represents the sum arising in the future
P represents the sum at the present time, when...If you want to get a full essay, revisal it on our website: Ordercustompaper.com
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