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In this video you'll uncover the crucial concept of the time value of money and how it impacts your financial decisions. Time Value of Money is an important concept for making good investment decisions. It's based on the principle that the timing of payments is important. You'll need this at work if you're a project manager, proposing a new idea to your boss that costs money. You'll also need this for evaluating different options or choices of investments.

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Here's what this video offers:

Time Value of Money Explained: Learn why a dollar today is worth more than a dollar tomorrow due to factors like investment opportunities, inflation, and risk.
Practical Excel Examples: Follow a stepbystep guide to understand if receiving a sum now is better than getting more money in installments over time.
Discover Excel's Power: See how to use Excel for calculating present value, with both manual methods and the NPV (Net Present Value) function.
RealLife Scenarios: Understand how to apply these concepts in real business cases, like evaluating a machinery purchase or a customer's payment proposal.
Tailored Discount Rates: Learn how the right discount rate can vary based on opportunity costs, inflation expectations, and risk assessments.

We can calculate this "time value of money" easily in Excel. In fact in this video, I'll show you an Excel template you can use to calculate the time value of money for any investment decisions.

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Question: If a customer asks you if instead of paying $10,000 in cash now he could pay $10,800 over 4 years. Is that a good deal for you?

The answer depends on several factors:
1. Opportunity Costs Money has an earning capacity. So, instead of waiting for the money, you could invest it and hopefully make more out of it. By getting the money later, you lose the opportunity to make an additional income.
2. Inflation Prices increase over time. So, the same item will probably cost more in a couple of years.
3. Risk Payments in the future always carry a certain risk. Will you really get the money then?
The combination of these factors defines the time value of money and is expressed as a discount rate. For instance a discount rate of 5% means that in each successive year the same amount of money is going to be worth 5% less than in the previous year.

You'll learn how to calculate Present Value (PV) manually and then we'll use the Excel NPV formula to calculate the Net Present Value in one go. Input values is the discount rate and the future cash flows.

In order to compare alternatives with different timing of payments we need to calculate their present value. In other words we need to discount future payments.
Companies often use their Weighted Average Cost of Capital (WACC) which is their average cost to get equity and debt. By applying their WACC as discount rate, any project that results in a NPV greater than zero is worth doing.

Key Takeaways:
The further in the future the payments are, the lower their present value will be
Think of the discount rate as a hurdle. The higher the hurdle, the more difficult it will be to get a high present value

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