Money is the Link between the Present and the Future
· 9 min read · Sep 19, 2018
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“The importance of money flows from it being a link between the present and the future”.
— John Maynard Keynes.
Keynes was a brilliant man who deeply understood money and economics. And his insights weren’t just intellectual and academic. He made two fortunes: one in the stock market and one in the art market. He understood value and investing and put his money where his mouth was.
The monetary linchpin between the present and the future is interest rates or discount rates. If you have a present value and you want to calculate a future value, we call it an interest rate. If you have future values and you want to estimate their worth today, we use a discount rate. Interest rates and discount rates are two sides of the same coin, to use a money metaphor.
The financial tool that captures the concept of the relationship between the present and future value of money is NPV: Net Present Value. By the end of this post you will know how it works and how to use it. The next five minutes could change your life.
This video is from my online corporate finance course.
Net Present Value (NPV) is the gold standard analytic technique used in financial analysis and investment decision-making. And spreadsheets like Excel make it super easy to use. Let’s talk about what NPV is, how its derived, and how to employ it.
NPV is the concept that ties it all together in understanding corporate finance.
As a seasoned financial expert with a proven track record in both theoretical understanding and practical application, I can confidently affirm the profound significance of money in linking the present and the future. The quote by John Maynard Keynes, a luminary in the realms of economics, encapsulates the essence of this connection. Keynes, not merely an intellectual giant but a pragmatic individual, demonstrated his insights by amassing fortunes in both the stock and art markets. His ability to translate theoretical understanding into tangible financial success underscores his mastery in comprehending the dynamics of money.
Now, delving into the concepts presented in the article, the central theme revolves around the role of interest rates or discount rates as the monetary linchpin connecting the present to the future. Interest rates play a pivotal role in determining the future value of present assets, while discount rates are instrumental in estimating the current worth of future values. This symbiotic relationship between interest rates and discount rates is aptly likened to two sides of the same coin, emphasizing their interdependence in financial calculations.
The article introduces the financial tool that crystallizes the concept of the relationship between present and future value: Net Present Value (NPV). NPV stands as the gold standard in financial analysis and investment decision-making. It serves as a powerful analytical technique, and the ubiquity of spreadsheet software like Excel has made it remarkably accessible for professionals and enthusiasts alike.
Net Present Value essentially allows individuals and corporations to evaluate the profitability of an investment by considering the present value of cash flows against the initial investment. It involves discounting future cash flows back to their present value, providing a clear framework for decision-making in financial matters.
In essence, understanding NPV is paramount in comprehending corporate finance. It is not merely a theoretical construct but a practical tool that empowers decision-makers to assess the viability and potential returns of various financial endeavors. The article promises to demystify NPV, elucidating its derivation and practical application, thereby offering readers the opportunity to enhance their financial acumen and potentially transform their lives through informed decision-making.
