Beruflich Dokumente
Kultur Dokumente
Slides by
Matthew Will Chapter 2
Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 2000
2- 2
Topics Covered
Present Value
Net Present Value
NPV Rule
ROR Rule
Opportunity Cost of Capital
Managers and the Interests of Shareholders
Present Value
Discount Rate
Interest rate used
to compute
present values of
future cash flows.
Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 2000
2- 4
Present Value
Present Value = PV
PV = discount factor C1
Present Value
Discount Factor = DF = PV of $1
DF 1
(1 r ) t
PV C1
(1r ) 400
(1.07 ) 374
Step 4: Go ahead if PV of payoff exceeds investment
C1
NPV = C0
1 r
PV of C1 $400 at 7%
400
PV 374
1 .07
Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 2000
2- 10
Example
In the project listed below, the foregone investment
opportunity is 12%. Should we do the project?
60
NPV = -50 + $4.55
1.10
Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 2000
2- 15
80 100 140
Expected payoff C1 $110
3
110,000
PV $95,650
1.15
A
80
B
40
20
40 60 80 100
income in period 0
Dollars
100 106.54
Now