When comparing multiple long-term financial obligations where each option has varied payments over time, it is important to look at the aggregate (total) cost of the liability as well as the Net Present Value (NPV). The NPV allows one to compare different payout schedules (or pay-ins) on the same playing field: What is this worth to me today? or, how much liability would this be in today’s dollars?
In the commercial real estate industry this is done all the time when comparing office leases. For example, if you are a company looking to move into office space (putting aside all other factors, ie. location, amenities, etc…) and you need to compare the costs of the different proposed office leases.
In the example below, I will show you how two deals can cost the exact same on an aggregate basis but when compared on an NPV basis (the value of those deals in today’s dollars) they can be very different. You will also learn which type of deal is preferred, and why, by both Landlords and Tenants.