NPV in Your Own Life

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?

CriteriaLevel 4 – Excellent

Level 3 – Proficient

Level 2 – Developing

Level 1 – Emerging

Quality of Initial Posting (first discussion only)

4 points

Initial posting reveals a clear understanding of all aspects of the threaded discussion question; uses factual and relevant information; and demonstrates full development of concepts.

3 points

Initial posting demonstrates legitimate reflection and answers most aspects of the threaded discussion question; full development of concepts is not evidenced.

2 points

Initial posting demonstrates some reflection and answers some aspects of the threaded discussion question; Limited development of concepts is evident.

1 point

Initial posting was not on topic; the response was unrelated to threaded discussion question; and post demonstrated only superficial thought and poor preparation.

/ 4

Quality of Responses to Classmates

6 points

Responded to the required number of students and to the professor, if appropriate, for every discussion. Demonstrated analysis of others’ posts; extends meaningful discussions by building on previous peer posts and offering alternative perspectives.

5 points

Responded to almost all of the required students and to the professor, if appropriate, for every discussion. Provided comments and new information to other posts; not all responses promote further discussion of the topic.

4 points

Responded to some students and to the professor, if appropriate, for every discussion. Little depth in response; agreed or acknowledged one other classmate’s initial posting.

3 points

Did not respond to any student or the professor.

/ 6

Reference to Supporting Readings/Information Literacy

3 points

Refers to and properly cites either course and/or outside readings in both initial posting and responses to peers.

2 points

Refers to and properly cites course and/or outside reading in initial posting only.

1 point

Makes some reference to assigned readings with some citations or cites questionable sources.

0 points

Makes no reference to assigned readings without citations or cites questionable sources.

/ 3

Critical Thinking

4 points

Demonstrates mastery conceptualizing the problem; viewpoints and assumptions of experts are analyzed, synthesized, and evaluated; and conclusions are logically presented with appropriate rationale.

3 points

Demonstrates considerable proficiency conceptualizing the problem; viewpoints and assumptions of experts are analyzed, synthesized, and evaluated; and conclusions are presented with necessary rationale.

2 points

Demonstrates partial proficiency conceptualizing the problem; viewpoints and assumptions of experts are analyzed, synthesized, and evaluated; and conclusions are somewhat consistent with the analysis and findings.

1 point

Demonstrates limited or poor proficiency conceptualizing the problem; viewpoints and assumptions of experts are analyzed, synthesized, and evaluated; and conclusions are either absent or poorly conceived and supported.

/ 4

Timeliness

3 points

Initial post occurs in a timely manner (1 – 3 days into module) allowing ample time for classmates to respond and engage.

2 points

Initial post occurs later (4 – 5 days into module) allowing limited time for classmates to respond and engage.

1 point

Initial post occurs substantially late (6-7 days into module) allowing minimal to no time for classmates to respond and engage.

0 points

Initial post occurs after the first week of the module.

/ 3

Total

/ 20

LEVEL 4

18 points minimum

LEVEL 3

16 points minimum

LEVEL 2

14 points minimum

LEVEL 1

0 points minimum

Response #1

Module 3 Week 1

Contains unread posts

posted Oct 20, 2018 10:01 AM

We know from our readings that the net present value of an investment can be calculated by discounting future cash flows by the required rate of return over a period of time (Ross, Westerfield, & Jordan, 2007). In making an investment decision a positive NPV can be vital to understanding if an investment is worthwhile. In a rental property my family owns, we have considered installing a battery bank to save on electricity. The local electrical company offers a plan with free nights. So the idea is to have the battery bank charge at night (while the electricity is free) and discharge during the day, effectively reducing are net expenditure on electricity. The company installing the battery bank has quoted $9,000 dollars for the purchase and installation of the bank. Expected savings are to be 4,800 dollars annually (400 dollars per month). Assuming a 15% required rate of return, and effective batteries for the first 10 years, we calculated the NPV to be $15,090 (Graulich, 2012). This is an acceptable investment for us, so we have elected to install the battery bank. The nice thing about this investment was having a good understanding of the initial cost outlay as well as accurate predictions about how much money the bank should save us, allowing for an accurate and effective NPV calculation.

References

Graulich. (2012, October 20). How to calculate NPV and IRR. Retrieved from You Tube:

ROSS, S., WESTERFIELD, R., & JORDAN, B. (2007). ESSENTIALS OF CORPORATE FINANCE. MCGRAW HILL.OVERALL SCORE

Response #2

NPV in Your Own Life

Contains unread posts

posted Oct 30, 2018 10:01 AM

My wife and I started a business together in 2014. This is her primary job and I help her out as much as I can. The business is classified as art, and as such each unit is time consuming and very detailed so she does a relatively small volume of units each year. All the work is done by her except in the first two years there was one step that she had so send out to be done elsewhere due to us not having an (relatively) expensive piece of machinery that cost $1796.52. The step that was being wholesaled cost us $80 per unit including shipping both ways. Near the end of our second year, we purchased the machine and began using it for year 3. I calculated a 4-year cash flow discounted for NPV with 3 years of actual data (2016-2018) and estimates for 2019. The NPV for the machine was $3,224.39 at the time of purchase and the discounted payback period was 2.37 years. I did not know how to calculate this precisely then, but I knew enough to estimate that it was worth the cost.

It has worked out well enough so far; however, this calculation does not take into consideration, that the formerly wholesaled step in her process has become my responsibility and I spend a weekend or two a month in the garage working for her.

Roberts, M. (2017). Decision criteria. Coursera. Retrieved from https://zh.coursera.org/learn/wharton-finance/lect…

MTS. (n. d.). Dakota Pro Series Flesher. McKenzie Taxidermy Supply. Retrieved fromhttps://www.mckenziesp.com/DKFP1-P16599.aspx