Present Value

Imagine that you are the Chief Operations Officer (COO) for NCU AMC. You have been tasked with deciding whether in invest in a new piece of equipment as a capital  purchase, and are considering purchasing from one of several vendors you are in active discussions with. As an incentive, one of the vendors pledges to buy back the piece of equipment in 3 years for $250,000.

Assuming a discount rate of 4%, what is the present value (PV) of the $250,000 to be received 3 years from now? Given your answer and using today’s date as the time of valuation, explain if a $1 received today is worth more or less than $1 received 3 years from now? Be sure to include the PV you derived in your response.

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Consider the following information in your response:

· How do you calculate the Net Present Value (NPV)?

· Why is it important to understand the future value of money spent in the present?

· How does understanding NPV affect strategic planning and capital budgeting?



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