What is NPV?

NPV is short for net present value. 

A good analogy for NPV is a mortgage.

It has an interest rate and payments over time.  The total paid back is larger than the amount borrowed.

If people can get a little more abstract, you can frame it as “time preference”.  Would you rather have $1,000 now or $1,100 next year?  They are worth different amounts.  Ask them to pick a number X to receive next year so that they wouldn’t know if they wanted to choose X next year or $1000 now.  The ratio is the discount rate.  This gets the basic concept across.  Then you say if you have a more complicated pattern of payments, you can apply the same principle over and over again – two years out is discounted twice, etc.  So the NPV is the amount of money today where are you indifferent to a complex guaranteed series of payments.

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