Monday, February 8, 2010

Net Present Value & Time Value of Money

Each Monday, our Venture Capitalist friend, Fred Wilson, over at tackles an important term from business school. To get us caught up, I will post the first two MBA Monday posts below:

  • The Present Value of Future Cash Flows: A business is worth all of the cash that business will ever generate discounted by the fact the business has not generated the cash yet (it is still in the future). In a spreadsheet, use the formula NPV.
  • Time Value of Money: Money you have is worth more than money you will earn in the future. Thus, earnings in the future are discounted to account for the risk and delay.

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