Dollars and (Per)Cents.
You’ll work alongside some amazing people in finance. One of those people for me was (let’s just call him) Douglas Fairchild.
At his retirement party, myself and others got to hear some of the stories that can only be told after the fact. Like his opinion of a now former colleague and the hundreds of unread emails that he refused to open from this company officer who drove him crazy. This guy didn’t give a rip. That’s what having the kind of money that can best be described with two letters and being micromanaged can do to a person. If we’re being honest, each of us can probably think of one person whose emails we’d like to never open again.
Douglas was in the conference room the day the cat had the tongue of everyone in attendance. None could find the words to describe Net Present Value!
This image was created with the assistance of DALL·E and prompts from Brent Pritchard.
Are you a cat person or dog person? Can a person be both?
Speaking of both, NPV and i(RR) are usually analyzed side by side. But that doesn’t mean that both will always lead to the same decision.
Here’s an excerpt from my book Would Your Boomerang Return? What Birds, Hurdlers, and Boomerangs Can Teach Us About the Time Value of Money (2023):
As mentioned, we can’t ignore the issue of accretion to value, or the scale of economics of an investment opportunity, which is one of the benefits of the NPV metric. This illustrates why IRR Analysis and NPV Analysis go hand in hand. The left hand needs to know what the right hand is doing.
Finance professionals have different metrics at the ready to analyze and evaluate finance and investment decisions. The primary focus of this chapter is how cash flow influences return on investment or i(RR), but any discussion regarding i(RR) should also consider NPV. Some people like to unnecessarily overcomplicate things, and in the field of finance, I see lots of people doing this with NPV. It is simply the Present Value of the future expected cash flows minus or net of the Present Value of the investment. Remember that i(RR) is the (d)i(scount rate) that makes the Net Present Value of an investment equal to $0.
What words would you use to describe Net Present Value?
Brent Pritchard is an author and college finance educator with over two decades of industry experience and cofounder of Boxholm Press, LLC, a family-owned-and-operated publishing company providing educational content, products, and services. He pioneers an innovative and approachable new way of learning and teaching the Time Value of Money as well as thought leadership in other business topics. His most recent book is Would Your Boomerang Return? You can contact him on his website here.