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Now, we have learned theory of present value and net present value, or also known as NPB.

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Now, again, we have to help John to evaluate two investment opportunities.

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So option one for John is to invest ten thousand dollars in buying a car and then he will receive two

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thousand dollars for the next five years by lending his car to a car rental company at the end of five

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years.

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He can sell that used car for four thousand dollars for additional income.

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Now, option two is to loan 10000 dollars to his trustworthy friend, for which he will be getting 500

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dollars each year for the first two years, then two thousand dollars per year for the next two years.

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And then for the next three years, he will be getting another three thousand dollars per year.

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Now, our objective is to help John in identifying which option is better for him.

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He can also invest this money in a savings bank account for an interest rate of six percent per annum.

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So to help John, we have to find present values for both of these options.

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Now, there are several informations hidden in this problem that we can extract.

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So first is the amount or the P value is 10000.

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The odd.

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Or discount rate is six percent because the bank is giving a six percent per annum.

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For the option one, the salvage value is 4000.

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That means after the completion of five years, he will be getting another four thousand dollars for

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selling the car.

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And option B, this salvage value is zero.

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Since he will not be getting any additional money after completing the term.

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Now, I have also listed the payment term for both of these options, so for option one, there are

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two columns for years and return.

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So at the end of year one, he will be getting two thousand dollars at the end of year two.

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He will be getting another two thousand dollars and so on, Bill.

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Five years.

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And I have also listed value, which is the salvage value at the end of year.

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No, for option B, the value is zero and this option will give return for the next seven years.

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So I have listed years in this column and the return he will be getting in this column.

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Now we will use Excel to find the present values for both of these options.

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Now there are two ways to find the present value.

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First one.

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As the Formula Peevey and second one is the Formula NPB.

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We use Peevey when they return each year is consent.

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So, for example, an option one, we are getting two thousand dollars for each year.

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So here we can use Peevey, we can use NPV when the returns are not concern throughout Dotun.

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So for the first two years, we are getting 500.

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For the next two years, we are getting 2000 thousand and then three thousand for the rest of three

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years.

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So the return is not constant.

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So here in such case, we can use NPB.

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Now, let's first calculate the present value for option one will be using B.V..

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Formula, and if you want any help regarding any of these parameters that this function is taking,

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you can go to formula tab.

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And click on this insert function button.

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When you click it, it will give you a dialog box in which all the parameters are mentioned, and if

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you select any parameter, it will give you the definition of that parameter just below in the dialog

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box.

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So first parameter here is rate, so what rate is zero point zero six?

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The second parameter is number of dumps.

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In this case, we are getting two thousand dollars for five years, so our term is five, so we will

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select.

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This cell.

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Now, the next parameter is payment, we will be getting each.

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So in this case, we are getting 2000, so we will be selecting this cell.

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The next is.

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This is the salvage value that we will be getting at the end of the term.

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So at the end of term, we will be getting another four thousand dollars when John sells his car.

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So we are selecting 4000 here.

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The next is type.

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So zero is for end of year and one is for the beginning of the year, we are considering we are getting

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all the payment at the end of the year.

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So we will write settle.

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And now you can see that we can preview the result of this formula in this dialog box itself.

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So now we can click on OK?

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And you can see that we have a total.

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Now, one more thing to notice is that this total is a negative value.

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There is no particular reason why this is negative.

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This is just one of the feature or one of the thing of Ms.

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Excel, it will always show you present value with the opposite sign.

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So if you are getting money and if you want to calculate the present value, it will always show you

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present value with the opposite sign.

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So if you are losing money, it will show you positive.

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And if you are gaining money, it will show you negative.

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So my advice is that I always look at your returns.

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If the returns are positive, change the sign of the total present value.

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So I will just put negative in front of this no, you can see that we are getting a positive value,

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so always look at your returns and take the same accordingly.

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Or you can also remember that whenever you are using a free use, negative sign before the formula.

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Now, this is the present value for option A. We are investing ten thousand dollars and we are getting

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around eleven thousand four hundred dollars back, so this is a good investment for John.

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Now, let's calculate the present value for option two here, we cannot use fee because the returns

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are not constant.

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For that reason, we have to use NPV.

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The formula of NPV is equal to NPV.

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And then first we have to give the rate.

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It is 01 06, and then we have to give the values.

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So these are all the values that we have.

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So this is the present value of option second.

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One more thing is that here, John is getting money, that's why we are using positive number for all

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the return value.

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But suppose if John have to invest another three thousand dollars at the end of five years, then we

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can put minus Simbel as well for investments or for the amount that John is paying.

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So you can use both signs, positive and negative, to represent inflow and outflow of cash.

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So the total and maybe an option two is around ten thousand five hundred.

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So we can directly compare the present value of option A and option B to suggest which one is better.

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And since the present value of option A.

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Is more than the present value of option B, we can suggest to John to buy a car and give it to a car

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rental company.

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So that's all for this lecture we have discussed two formulas, B.V. and NPV PV is used when the cash

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inflow is constrained and NPV is used when the cash inflow or outflow is not constant.

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Again, remember to use negative symbol when you are using baby formula.