Net Present Value: What Future Income Is Worth Today

less than 1m read

·Nov 3, 2024

Let’s talk about NPV. NPV is just the net present value of something. It’s when you say that stream of payments I’m gonna get in the future: what is that worth today?

So a common example of this is you're joining a startup company and you're getting stock options. The founder says, “Well, this company is going to be worth a billion dollars and I’m giving you 0.1 percent of the company; therefore, you’re getting a million dollars worth of stock.” What he’s or she’s arguing is what’s going to be worth in the future. You have to discount that back to today. You have to figure out what is that worth today, and you have to apply a discount rate or an interest rate that takes into account the massive risk the startups face.

What you end up with is the price that it’s worth today, and that’s the price at which a venture capitalist would invest in the company today. So if that founder just raised a round at ten million dollars and that company’s only worth one percent of what the founder's arguing, your million-dollar package is actually worth ten thousand dollars.

So NPV calculations, at a very rough level, you should be very comfortable doing in your head.

Partial derivatives of vector fields

The Black Hole Bomb and Black Hole Civilizations

View All

The Machinery Of Freedom: Illustrated summary

In the nineteenth century, the political philosophy that supported small government and free markets was called liberalism. Unfortunately, between then and now, the enemies of liberalism succeeded in stealing its name. Which is why people with similar vie…

Exploring Buenos Aires | National Geographic

When I first visited Buenos Aires, I immediately fell in love. To me, there’s no city like this in the entire world. My name is Kristen Borg; I’m a travel enthusiast and a contributor for National Geographic. I first came through here on my way to Patagon…

Unadopted amendments to the Bill of Rights | US government and civics | Khan Academy

Hi, this is Kim from Khan Academy. Did you know that what we call the First Amendment today was actually the Third Amendment in the original draft of the Bill of Rights? In fact, there were more than 200 proposed amendments, which were whittled down to ju…

Free Will: be glad you don't have it

Free Will is a fantasy we should be glad we don’t have it. Um, I’m going to talk about the implications of radical Free Will and why we’re much better off without it. So, what is Free Will? Um, in this video, I’m talking specifically about a version of F…

Property insurance | Insurance | Financial Literacy | Khan Academy

Let’s talk a little bit about property insurance. The first question is, why would you want to insure property? Well, for a lot of folks, their property is a lot of, uh, the most expensive things they have that would be very hard to replace if something b…

Trig limit using pythagorean identity | Limits and continuity | AP Calculus AB | Khan Academy

Let’s see if we can find the limit as theta approaches 0 of ( \frac{1 - \cos(\theta)}{2 \sin^2(\theta)} ). And like always, pause the video and see if you could work through this. Alright, well our first temptation is to say, well, this is going to be th…

Net Present Value: What Future Income Is Worth Today

More Articles