Ch004A

# Ch004A - 4A.4 a Since the PV of labor income is \$60 and \$60...

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Appendix 4A: Net Present Value: First Principles of Finance 4A.1 \$120,000 – (\$150,000 – \$100,000) (1.1) = \$65,000 4A.2 \$40,000 + (\$50,000 – \$20,000) (1.12) = \$73,600 4A.3 Financial markets arise to facilitate borrowing and lending between individuals. By borrowing and lending, people can adjust their pattern of consumption over time to fit their particular preferences. This allows corporations to accept all positive NPV projects, regardless of the inter- temporal consumption preferences of the shareholders.
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Unformatted text preview: 4A.4 a. Since the PV of labor income is \$60, and \$60 = \$40 + \$22/(1 + r), r must be equal to 10%. b. NPV = \$75 – \$60 = \$15 c. Her wealth is \$75. Letting C denote consumption, she wants \$75 = C + C/(1 + r) where r = 0.10. Solve for C; C = \$39.29. 4A.5 a. \$90,000/\$80,000 – 1 = 0.125 = 12.5% b. Harry will invest \$10,000 in financial assets and \$30,000 in productive assets today. c. NPV = –\$30,000 + \$56,250/1.125 = \$20,000 B-74...
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