No. 14 · Decisions · Economics
Net Present Value
Money has a timestamp: compare what something costs today with what its future returns are worth today.
In the Almanac
“Sixty guilders for Manhattan”, 1626 · “Iridium”, 1998–2000
Both stories in full, three ways to use it and where it misleads.
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Questions
What is Net Present Value?
Net Present Value converts future cash flows into today's money by discounting them for time, risk and the returns you could earn elsewhere. If what you get back, in today's terms, exceeds what you pay, the investment creates value.
How do you use Net Present Value?
Use it for courses, home upgrades or any choice where costs come now and benefits come later. Be honest about your forecasts and your discount rate, because a precise number can hide hopeful guesses.
When does Net Present Value matter?
Net Present Value is one of the 35 mental models for decisions, the situations where you ask: Which way should I go? Within that, it belongs to “Valuing time and money”, alongside Discount Rate, Inflation and Switching Costs.
What is an example of Net Present Value?
Two stories show it at work: Sixty guilders for Manhattan (1626) and Iridium (1998–2000). Both are told in full in The Mental Models Daily Almanac, which has two stories for each of its 365 models.
Which mental models are related to Net Present Value?
Discount Rate, Expected Value and Optimism Bias. Net Present Value itself comes from economics.