64 Appendix 4: Frequently asked questions (FAQs) Appendices Lightcast recognizes that some institutions may want to make comparisons. As a word of caution, if comparing to an institution that had a study commissioned by a firm other than Lightcast, then differences in methodology will create an “apples to oranges” comparison and will therefore be difficult. The study results should be seen as unique to each institution. Net present value (NPV): How do I communicate this in laymen’s terms? Which would you rather have: a dollar right now or a dollar 30 years from now? That most people will choose a dollar now is the crux of net present value. The preference for a dollar today means today’s dollar is therefore worth more than it would be in the future (in most people’s opinion). Because the dollar today is worth more than a dollar in 30 years, the dollar 30 years from now needs to be adjusted to express its worth today. Adjusting the values for this “time value of money” is called discounting and the result of adding them all up after discounting each value is called net present value. Internal rate of return (IRR): How do I communicate this in laymen’s terms? Using the bank as an example, an individual needs to decide between spending all of their paycheck today and putting it into savings. If they spend it today, they know what it is worth: $1 = $1. If they put it into savings, they need to know that there will be some sort of return to them for spending those dollars in the future rather than now. This is why banks offer interest rates and deposit interest earnings. This makes it so an individual can expect, for example, a 3% return in the future for money that they put into savings now.
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