Discussion

Reading about Net Present Value (NPV) for this module, you probably thought of it as a technique used only by corporations. But the technique may also apply to your own purchases.

You may have heard a salesperson tell you, “This product pays for itself!” While this is probably rare for most products, sometimes there are future savings from certain products that will offset some of the costs. For example, if you buy a newer, more reliable, and more fuel-efficient car, it may save you on repair bills and gas prices compared with your old car. If you are a coffee connoisseur, buying a $100 espresso machine might save you money compared with constantly buying $4 drinks at your local Starbucks.

Think of a purchase you are planning to make or have recently made. How much did it cost? How much per year do you think you will save from this purchase, and for how many years will you get these savings? Estimate the present value of the savings, and subtract the cost of the product. Note that it is rare that any purchase will “pay for itself” (e.g., have a positive NPV). But are the savings enough that the product becomes a lot “cheaper” and more worthwhile for you to buy?

Response 1

Good morning class,

I wished I knew how to use NPV as a teen growing up. This discussion made me think about a time when it seemed like everyone was ordering a Gateway computer. Many commercials about it said, “it practically pays for it self.” I wasn’t even thinking about the total purchase because all I knew was its only $75.00 a month. Learning Net present value (NPV) made me want to slap myself. Understanding it now, NPV is something I could have used to determine the current value of my future purchase from paying for the computer annually or just out right buying it (Jagerson, 2020). Times were a little hard years ago. I will explain if I knew NPV back then, how it would or would not impact my decision to by the computer. The computer I wanted I added different ram and speed to it so the cost of the computer was $2,700. All I had to pay was $900 a year which came out to $75 a month. The interest rate was 9% or close to it. I had a three year contract with Gateway at the time. If I out right purchase the computer, the cost to me would be $2,700 and it is mine. I would $900 for the year as for the payment arrangement. Then $900 for years 1,2, and 3. The total after those three years came to $3,178.17. I got that by taken the annual payment $900 add NPV open bracket the 9% times year 1,2,3 close bracket. This gave me what I mention earlier the $3,178.17. If I knew I would have paid an extra 478.17 I would have purchase it outright.

Cost of computer

$ 2,700.00

Payment Plan

$ 900.00

Annual interest rate

9%

Year

Purchase

Lease

0

$ 2,700.00

$ 900.00

1

$ 900.00

2

$ 900.00

3

$ 900.00

$ 2,700.00

$ 3,178.17

$ (478.17)

Jagerson, J., (2020, September 29). What Is the Formula for Calculating Net Present Value (NPV)? Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/valuation/net-present-value-npv/

Response 2

Hi Class. For my Discussion, I decided to take the idea given in the example of getting an espresso machine to save money spent at start bucks. I decided to use a kegerator to drink beer compared to drinking beer at a bar. The current price of a kegerator is around $1,000 on Amazon right now. A keg should be used within 3 months of tapping it, so for my calculations, I will do 4 kegs for a year. IRR is 5% for the year but broken down to 1.25% per quarter. A few more equations I used to figure out the cost per pint, but it came out to roughly $1 a pint with a keg, vs $6 a pint at a bar. So I would be paying $124 for the keg, but if I was buying 124 pints at a bar it would cost me $744. Each of the quarters was -124 or -744 as it was an expense, not revenue. The NPV came out to -$480.88 for the year for kegs and -$2236 for the year for drinking at the bar. The keg had an initial $1000 cost while the bar had no expense. Both options ended up costing a lot of money, but the kegerator was $755.32 cheaper of the course of the year. There are some other factors and expenses that could also be taken into account. For example, drinking at a bar would usually include Uber money or gas money for a DD. One other idea to consider is that having a keg in your house could result in you drinking more than you normally would and actually increase the amount you spend. This equation assumes that you are drinking the same amount at home over the course of the year as you would at a bar.

Cheers,

Jonathan

Cashflow

Kegerator

Bar Drinks

CF0

-1000

0

CF1

-124

-744

CF2

-124

-744

CF3

-124

-744

CF4

-124

-744

NPV

-$480.88

-$2,236.20

-1000

0

NPV

-$1,480.88

-$2,236.20

saving=

-$755.32

Reference:

Ihatemathdotcom. (2012, June 25). How to calculate NPV and IRR (Net Present Value and Internal Rate Return) EXCEL. Retrieved from https://www.youtube.com/watch?v=kCnwCplibAk&t=230s

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