How much per year do you think you will save from this purchase, and for how many years will you get these savings?
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?REF:Fabozzi, F. J., & Peterson Drake, P. (2009). Chapter 14: Capital budgeting techniques. In Finance: Capital markets, financial management, and investment management. Wiley. Available in the Trident Online Library.Advani, R. (2018). Chapter 8: Cost of capital. In The Wall Street MBA: Your personal crash course in corporate finance (3rd ed.). McGraw-Hill. ISBN:9781260135596. Available in the Skillsoft Books database through the Trident Online Library.Next, view the video that explains Weighted Average Cost of Capital (WACC):BlueBookAcademy.com. (2015, July 17). Learn it FAST: Weighted average cost of capital explained [Video file]. Retrieved from https://www.youtube.com/watch?v=JIvokDfW9AQ&t=48sFinally, check out the following videos that will show you how to make capital budgeting calculations using Excel:Graulich, V. (2012, June 25). How to calculate NPV and IRR [Video file]. Retrieved from https://www.youtube.com/watch?v=kCnwCplibAk&t=230sdanthehokie. (2012, June 28). Using Excel to calculate NPV and IRR [Video file]. Retrieved from https://youtu.be/lWY3abc4hz0
