Just like everyone I was totally lost on the choice 3 being the best outcome as when you calculate FV it is obviously the worst case. I believe the calculation is all wrong. I have nothing to do with finance so I don't know if my formula would be considered correct but here is how I see it:
In choice 3 the calculation that was used was
20 + 50 / 1.01 + 35/1.05 * 1.05
where I see the discount rate is the percent that you are loosing, so to me in year 1 you are not loosing merely 1%
One the $50 you are loosing 5% on first year and 4% on the second year, as you can now invest 50 for the year one but only at 1% vs % so my calculation for PV for choice 3 is
20 + 50 / 1.05 * 1.04 + 35 / 1.05 * 1.05 = 97.53 which is the actual PV of choice 3 and therefore the worst
Break down 50 / 1.05 * 1.04 is that first year you loose %5 on 50 and second 4% on 50 as you are earning 1%
Now the numbers add up - any thoughts as the math was driving me crazy....
In Introduction to Present Value you said it's either have $100 now and put it up for 5%, receiving $105 after a year, or getting $110 in a year. Waiting clearly was the better choice.
In PV3 (and PV2) this was consistent: the higher the PV, the better.
But when you look at your return in the end, you'll find here case 1 is best:
But apart from this mistake: Either I got it totally wrong or discounted cash flow messes up the concept of PV completely. While before you could easily compare the PV and tell with which case you were better off, it simply doesn't work here anymore.
In your discounted cash flow example case 3 has the highest PV, but it's clearly the worst option for you. Even the lowest PV case (case 2) is better.
What's the difference between discount rate and interest rate? Are the terms used interchangeably? Is the discount rate a fancy term for interest rate being used backwards i.e. finding out the present worth of some money in the future as opposed to finding out the future value of some money in the present?
@someguy1228 You’re absolutely right, the discount rate is just the interest rate except applied backwards so the present value can be determined; just like yield is simply the interest rate being applied forwards so the future value can be determined.
i m an engineer so i dont really know the answer... but i guess the reason why the 3rd choice is better is because - its present value is greater than the rest???? and its all about present value....
one thing to observe - coincidently for PV5%, both PV and FV for choice 1 is greater than choice 2. for PV2%, both PV and FV for choice 2 is greater than choice 1. so could it be-> we are confused of which is more important? PV or FV?
i agree with Hudson too, but are we really considering FV?
If I invest 20 for 2 years at 5% then I get 22.05 from that. After a year I also get 50 for one year at 1% and finally I get 35 bucks on top of everything. That comes out to be 107.55. How is the last option better then? Doing something wrong with my math?
Present day value of 35 dollars at 5% per year for two years is better than future value of 20 dollars at 5% per year for two years. That's the way I see it
In the video, you compared the present value of the 3 scenarios and concluded that option 3 was the most valuable because it had the highest PV. Could you have also made the comparison by finding the future (year 2) value of option 3 and comparing that to the year 2 values of options 1 and 2? I computed 20*(1.05)^2 + 50*(1.01)^1 + 35 = 107.55, but that indicates that option 1 is the better choice because it has the greatest value in year 2. What did I do wrong?
Maybe you have to calculate the present value the following way: 20 + 50*1.01/(1.05^2) + 35/(1.05^2). Because the present value represents the value the money would have if you could do with it whatever you wanted (ie invest it for 2 years, you wouldnt invest the 50$ for just 1 year), so you first have to compute the future value it would have after two years, and then go backwards to the present time. I'm not sure if that's correct, but at least it seems like the numbers work this way.
You did wrong this: you assumed that you won't need your money for at least two years. In the 3rd case you actually get SOME money every year, so you'll end up worse only after the full two years. In other words, in opt 1, you have $0 1st, $0 2nd and $110.25 the 3rd year. This is reflected in the PV, which takes into account the "pleasure" of having the money asap. But ofc, if you know you won't need your money for next 2 years, choose 1st opt, because the FV is better.
I'm not sure if anyone has the same problem as i do, but the video stops after 1:38 mins for the present value part 4. I really have been enjoying this video until this point. If you see this comment sal, please check this video and reload it again. I really love your tutorials though. I really do appreciate it.
My one question is, wouldn't you still want choice 1? Because although the present value of three is 101.25, the future value is only 107.55. So even though it looks the best at the beginning because you can only invest the $50 for one year, you still have the least in two years.
Hi, Hats off for your wonderful explanation. but I was thinking the example 3 was not distributed properly as the sum is $105. It would have been interesting if it was $110 as when you did a 2% interest, your example 2 had 105.72 as your present value which is already greater than example 3's 2 yr value..So no point checking the PV of example 3 as its already less. Hope you understood my concern.
I'm not sure if that's correct, but at least it seems like the numbers work this way.
MrPEDOCTOR 1 month ago
This has been flagged as spam show
really helpful and informative..thanks a lot for sharing.. :D
dayspeace 3 months ago
Wow,this is so helpful for my finance class. Thanks.
insomniacgrace 3 months ago
"Year 1 lol"
Greenwithevil 5 months ago
easy
michaelhunter03 7 months ago
the choice for highest PV and highest FV is different.
so what?it depends whether u want the highest PV or highest FV?
jeyeee 8 months ago
I believe the PV in option 2 should be $110/(1.05)(1.01) = $103.72. That makes it the best option.
raevansmd 9 months ago
@raevansmd the second option is only available after 2 years so you have to use the 5% only and square it
saruxman93 8 months ago
Just like everyone I was totally lost on the choice 3 being the best outcome as when you calculate FV it is obviously the worst case. I believe the calculation is all wrong. I have nothing to do with finance so I don't know if my formula would be considered correct but here is how I see it:
In choice 3 the calculation that was used was
20 + 50 / 1.01 + 35/1.05 * 1.05
where I see the discount rate is the percent that you are loosing, so to me in year 1 you are not loosing merely 1%
julikland 1 year ago
One the $50 you are loosing 5% on first year and 4% on the second year, as you can now invest 50 for the year one but only at 1% vs % so my calculation for PV for choice 3 is
20 + 50 / 1.05 * 1.04 + 35 / 1.05 * 1.05 = 97.53 which is the actual PV of choice 3 and therefore the worst
Break down 50 / 1.05 * 1.04 is that first year you loose %5 on 50 and second 4% on 50 as you are earning 1%
Now the numbers add up - any thoughts as the math was driving me crazy....
julikland 1 year ago
In Introduction to Present Value you said it's either have $100 now and put it up for 5%, receiving $105 after a year, or getting $110 in a year. Waiting clearly was the better choice.
In PV3 (and PV2) this was consistent: the higher the PV, the better.
But when you look at your return in the end, you'll find here case 1 is best:
1) $ 100 * (1,05)^2 = $110,5; PV=100
2) $ 110 ; PV = 99,77
3) $ 20 * (1,05)^2 + $50 * 1,01 + $35 = $107,55; PV = 101,25
The highest PV is not best! What did I miss?
grendelkeep 1 year ago
@grendelkeep
Sorry, 100 * (1,05)^2 = 110,25; not 110,5.
But apart from this mistake: Either I got it totally wrong or discounted cash flow messes up the concept of PV completely. While before you could easily compare the PV and tell with which case you were better off, it simply doesn't work here anymore.
In your discounted cash flow example case 3 has the highest PV, but it's clearly the worst option for you. Even the lowest PV case (case 2) is better.
grendelkeep 1 year ago
so you go into the bank and say: Hey bank, you can give me all your money right away 'cause Sal taught me finance !
rocco133 1 year ago
What's the difference between discount rate and interest rate? Are the terms used interchangeably? Is the discount rate a fancy term for interest rate being used backwards i.e. finding out the present worth of some money in the future as opposed to finding out the future value of some money in the present?
someguy1228 1 year ago
@someguy1228 You’re absolutely right, the discount rate is just the interest rate except applied backwards so the present value can be determined; just like yield is simply the interest rate being applied forwards so the future value can be determined.
MarvelsofaLifetime 10 months ago
@MarvelsofaLifetime I appreciate the feedback even if it has been a while.
someguy1228 10 months ago
What's the difference between discount rate and interest rate? Are the terms used interchangeably?
someguy1228 1 year ago
good video...but can go abit faster i think
jerry1027 1 year ago
Sal, this can get confusing because you are not using the right term. this is the NET PRESENT VALUE (NPV, not PV)
MuscletechRussia 1 year ago
@MuscletechRussia It is both the present value and the net present value.
The Net present value = present value - required investment.
In this situation, the required investment = 0.
Therefore, the answer for both is the same.
In this scenario, it makes more sense to call it PV because he hasn't included the cost of the initial investment.
Englishdosser86 1 year ago
i m an engineer so i dont really know the answer... but i guess the reason why the 3rd choice is better is because - its present value is greater than the rest???? and its all about present value....
one thing to observe - coincidently for PV5%, both PV and FV for choice 1 is greater than choice 2. for PV2%, both PV and FV for choice 2 is greater than choice 1. so could it be-> we are confused of which is more important? PV or FV?
i agree with Hudson too, but are we really considering FV?
chinsoon1231 1 year ago
If I invest 20 for 2 years at 5% then I get 22.05 from that. After a year I also get 50 for one year at 1% and finally I get 35 bucks on top of everything. That comes out to be 107.55. How is the last option better then? Doing something wrong with my math?
apricimo 1 year ago
Present day value of 35 dollars at 5% per year for two years is better than future value of 20 dollars at 5% per year for two years. That's the way I see it
apricimo 1 year ago
have you got a management accountant perspective because this is the financial manager.
theworldGodonlyknows 1 year ago
In the video, you compared the present value of the 3 scenarios and concluded that option 3 was the most valuable because it had the highest PV. Could you have also made the comparison by finding the future (year 2) value of option 3 and comparing that to the year 2 values of options 1 and 2? I computed 20*(1.05)^2 + 50*(1.01)^1 + 35 = 107.55, but that indicates that option 1 is the better choice because it has the greatest value in year 2. What did I do wrong?
Hudson4351 2 years ago 11
Maybe you have to calculate the present value the following way: 20 + 50*1.01/(1.05^2) + 35/(1.05^2). Because the present value represents the value the money would have if you could do with it whatever you wanted (ie invest it for 2 years, you wouldnt invest the 50$ for just 1 year), so you first have to compute the future value it would have after two years, and then go backwards to the present time. I'm not sure if that's correct, but at least it seems like the numbers work this way.
sesshoumaru1981 1 year ago
@Hudson4351 I think the video is wrong. I think you are right. Option 1 is the best in year 2.
MrMattR1 1 year ago
@Hudson4351 shut up dummy
michaelhunter03 7 months ago
@Hudson4351
You did wrong this: you assumed that you won't need your money for at least two years. In the 3rd case you actually get SOME money every year, so you'll end up worse only after the full two years. In other words, in opt 1, you have $0 1st, $0 2nd and $110.25 the 3rd year. This is reflected in the PV, which takes into account the "pleasure" of having the money asap. But ofc, if you know you won't need your money for next 2 years, choose 1st opt, because the FV is better.
xbuchtak 4 months ago in playlist Finance
Hi Sal,
Is there a reason that we are using annually compounded interest instead of continuously compounded? (industry std. for demand accounts maybe?) Thx,
kingcrownover 2 years ago
I'm not sure if anyone has the same problem as i do, but the video stops after 1:38 mins for the present value part 4. I really have been enjoying this video until this point. If you see this comment sal, please check this video and reload it again. I really love your tutorials though. I really do appreciate it.
globalidol 2 years ago
Badass!!!!!!!!
royalwithcheeese 2 years ago
My one question is, wouldn't you still want choice 1? Because although the present value of three is 101.25, the future value is only 107.55. So even though it looks the best at the beginning because you can only invest the $50 for one year, you still have the least in two years.
Purejiggy7 3 years ago
choice 1( future value) = 110.25
choice2( future value) = 107.55
after 2 years...
which one would u choose?
common sense says choice1
blessedevil85 2 years ago
@Purejiggy7 How did you get 107.55?
TheyDontKnowImHere 2 years ago
Hi, Hats off for your wonderful explanation. but I was thinking the example 3 was not distributed properly as the sum is $105. It would have been interesting if it was $110 as when you did a 2% interest, your example 2 had 105.72 as your present value which is already greater than example 3's 2 yr value..So no point checking the PV of example 3 as its already less. Hope you understood my concern.
Ashwin
ashwinvm1979 3 years ago
Sal. Great effort. Been out of school for 20 years and was having trouble grasping until I came across your Finance videos.
I can play them over and over again until I fully understand them before moving forward.
LostinArnhem 3 years ago
This has been flagged as spam show
Awesome! I'm doing my MBA and learning about NPV/PV/FPV right now and have found your videos extremely useful!!!
sagevadi 3 years ago 2
where did you download that calculator?
Harry0Ron0Hermione 3 years ago
Did you watch the previous 3 videos?
khanacademy 3 years ago 24
have u got any videos on bussiness analysis i like yo videos am studying acca to b a chattered accountant thanks
monksquare 3 years ago
@khanacademy
lol!
parklinkin52 1 year ago