Daud Machiya
2 hours ago
What is the Net Future Value with an example of Net Future Value?
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ChatGPT
2 hours ago
Net Future Value (NFV) is a financial metric that calculates the present value of cash flows expected to be generated by an investment, minus the initial cost of the investment. It helps investors determine the profitability of an investment by taking into account the time value of money.
Example of Net Future Value:
Let's say you are considering investing in a rental property that will generate rental income of $1,000 per month for the next 10 years. The initial cost of purchasing the property is $100,000. To calculate the Net Future Value of this investment, you would first calculate the present value of the cash flows generated by the rental income over the 10-year period.
Assuming a discount rate of 5%, the present value of the rental income would be:
PV = $1,000 / (1 + 0.05)^1 + $1,000 / (1 + 0.05)^2 + ... + $1,000 / (1 + 0.05)^10
PV = $1,000 / 1.05 + $1,000 / 1.1025 + ... + $1,000 / 1.6289
PV = $952.38 + $907.03 + ... + $613.91
PV = $8,514.47
Next, subtract the initial cost of the investment from the present value of the cash flows to calculate the Net Future Value:
NFV = $8,514.47 - $100,000
NFV = -$91,485.53
In this example, the Net Future Value of the investment in the rental property is -$91,485.53, indicating that the investment is not profitable when considering the time value of money.
Example of Net Future Value:
Let's say you are considering investing in a rental property that will generate rental income of $1,000 per month for the next 10 years. The initial cost of purchasing the property is $100,000. To calculate the Net Future Value of this investment, you would first calculate the present value of the cash flows generated by the rental income over the 10-year period.
Assuming a discount rate of 5%, the present value of the rental income would be:
PV = $1,000 / (1 + 0.05)^1 + $1,000 / (1 + 0.05)^2 + ... + $1,000 / (1 + 0.05)^10
PV = $1,000 / 1.05 + $1,000 / 1.1025 + ... + $1,000 / 1.6289
PV = $952.38 + $907.03 + ... + $613.91
PV = $8,514.47
Next, subtract the initial cost of the investment from the present value of the cash flows to calculate the Net Future Value:
NFV = $8,514.47 - $100,000
NFV = -$91,485.53
In this example, the Net Future Value of the investment in the rental property is -$91,485.53, indicating that the investment is not profitable when considering the time value of money.
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Google Gemini AI
2 hours ago
Net Future Value (NFV)
NFV is the present value of the future cash flows received from an investment minus the present value of the future cash flows paid for the investment.
Example of Net Future Value
Consider the following investment opportunity:
- Initial investment: $100,000
- Expected future cash flows:
- Year 1: $20,000
- Year 2: $30,000
- Year 3: $50,000
- Discount rate: 5%
Step 1: Calculate the Future Value of the Cash Flows
Using the annuity formula, the future value of the cash flows (FV) is:
```
FV = $20,000 - (1 + 0.05)^2 + $30,000 - (1 + 0.05)^1 + $50,000 - (1 + 0.05)^0
= $21,025 + $31,579 + $50,000
= $102,604
```
Step 2: Calculate the Present Value of the Cash Flows
Using the present value formula, the present value of the cash flows (PV) is:
```
PV = $20,000 - (1 / (1 + 0.05)^2) + $30,000 - (1 / (1 + 0.05)^1) + $50,000 - (1 / (1 + 0.05)^0)
= $18,110 + $28,571 + $50,000
= $96,681
```
Step 3: Calculate the Net Future Value
The NFV is the difference between the future value and the present value:
```
NFV = FV - PV
= $102,604 - $96,681
= $5,923
```
Conclusion
The NFV of the investment is $5,923. This means that after taking into account the initial investment and the expected future cash flows, the investment is expected to generate a net gain of $5,923 in today's dollars.
NFV is the present value of the future cash flows received from an investment minus the present value of the future cash flows paid for the investment.
Example of Net Future Value
Consider the following investment opportunity:
- Initial investment: $100,000
- Expected future cash flows:
- Year 1: $20,000
- Year 2: $30,000
- Year 3: $50,000
- Discount rate: 5%
Step 1: Calculate the Future Value of the Cash Flows
Using the annuity formula, the future value of the cash flows (FV) is:
```
FV = $20,000 - (1 + 0.05)^2 + $30,000 - (1 + 0.05)^1 + $50,000 - (1 + 0.05)^0
= $21,025 + $31,579 + $50,000
= $102,604
```
Step 2: Calculate the Present Value of the Cash Flows
Using the present value formula, the present value of the cash flows (PV) is:
```
PV = $20,000 - (1 / (1 + 0.05)^2) + $30,000 - (1 / (1 + 0.05)^1) + $50,000 - (1 / (1 + 0.05)^0)
= $18,110 + $28,571 + $50,000
= $96,681
```
Step 3: Calculate the Net Future Value
The NFV is the difference between the future value and the present value:
```
NFV = FV - PV
= $102,604 - $96,681
= $5,923
```
Conclusion
The NFV of the investment is $5,923. This means that after taking into account the initial investment and the expected future cash flows, the investment is expected to generate a net gain of $5,923 in today's dollars.
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