You have been asked by a manager in your organization to put together a training

Question

You have been asked by a manager in your organization to put together a training program explaining Net Present Value (NPV) and Future Value (FV) and how they are used to evaluate the price of stock. You have been given the following objectives:

Upon completing your Net Present Value (NPV) and Future Value (FV) Training Program, employees should be able to do the following:

Explain NPV and FV.

Describe the factors that are used in the NPV and the FV formulas.

Give an example of how to use the formulas for NPV and FV for a stock purchase.

Summarize the differences between the two formulas and the purpose of using each.

Develop a 10- to 12-slide PowerPoint Presentation (excluding title slide and reference slide) that cover each of the above topics. In the slide notes, include your explanations for each topic above. You must use a minimum of two scholarly sources. Format the presentation and cite your resources according to the APA 6th edition style guide as outlined in the Ashford Writing Center.

Explanation / Answer

Answer:

The material given below can be put on power point to make 10-12 slides:

Slide-1

NPV defined:

NPV = It is net present value of some value given in future.

You can understand this concept by this example. Suppose you want to have $500 after a year so that you can buy an electronic gadget. To get this money you will have to invest some money today. Therefore net present value is the amount we should invest today at some interest rate to get this $500 in future.

Slide-2

The formula of NPV is:

NPV = Sum of present value of all future values

NPV = FV/(1+r%)n

Here in this formula different factors are:

FV= Future value; for that present value needs to be calculated.

r%= This is discount rate. Normally this is the rate of interest on

       investment.

n= number of years of discounting.

Slide-3

FV , Future value defined:

FV = Future value is the amount of money that one receives after a year or so after making an investment at some rate of interest.

For example today you invest $100 at 10% interest rate per annum. This money will grow at 10% p.a. and become $110 after a year. This $110 is the future value of $100.

Also, it can be understood that $100 is the present value of $110 at 10% discount rate.

Slide-4

The formula for Future value is:

FV= Future value = PV(1+r%)n

Here,

FV is future value

PV is Present value

r% is discount rate or rate of interest earned.

n is number of years or number of periods.

Slide-5

Present value formula is:

PV = Present value = FV / (1+r%)n

Here in this formula different factors are:

FV= Future value; for that present value needs to be calculated.

r%= This is discount rate. Normally this is the rate of interest on

       investment.

n= number of years of discounting.

Now we know that stocks/shares are the financial instruments that give us returns in terms of dividends in different future periods.

Slide-6

Let us assume that an investor receives D1, D2, D3, ….Dn , these n dividends in n years to come.

Also it is given that the required rate of return for the investor is r%. This rate we can take as discount rate.

Now we can use present value formula and discount all of these dividends, given in future periods, at a discount rate of r%.

The sum of all of those present values would be the Share value or stock value, which is also known as Fair Value of stock.

Slide-7

Therefore by using the present value formula and taking dividends:

Present value = PV = Fair value of share

                                = D1/(1+r%)1 + D2/(1+r%)2 + D3/(1+r%)3 +…+              

                                                                                             Dn/(1+r%)n

Here,

D1, D2, D3, and Dn are n dividends

r% is discount rate to calculate present value of dividends.

n is total dividends given.

Slide-8

Purpose of using these formulas:

Therefore by using this formula we can calculate the fair market value of shares. This value is important to time our purchase of any company shares.

As fair market value of stock < current market price, then the share/stock is overvalued. Investment in this stock is not beneficial as after some time stock value may come down to its original fair value and you can lose a lot of money in your investment.

If fair market value > current market price then investing in this share will be good as this is a share you can invest in for less money and after some years share can increase to its fair value and would give you a lots of profit.

Slide-9

Difference between NPV and FV:

The major difference between these two formulas is the time period at which these two are present.

NPV formula gives you a fair idea about the decision you want to take today on the basis of the value it provides you.

FV formula gives you a fair idea about the worth of investment in future.

Slide-10

References:

Ross, Stephen.A., W.Westerfield Randolph & Jaffe Jeffrey. (2008). Corporate Finance, Eighth Edition, McGraw-Hill Irwin.

Van Horne James C., Wachowicz John M. (2008). Fundamentals of Financial Management, 13th edition, Pearson Education.

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