Lecture 2 NPV 2010

Lecture 2 NPV 2010 - Lecture 2 DADSS Engineering Economics...

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1 Lecture 2 Engineering Economics Net Present Value DADSS
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2 Administrative Details Homework #1 Due Homework Assignment #2 TA Office Hours (SDS conference room PH223) Monday 5:30-8:00 Wednesday 5:30-8:00 Excel review next Wednesday 4:00-5:00 in Baker 140F Questions from last class?
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Upon Return to: Dr. Paul S. Fischbeck Department of Social and Decision Sciences Carnegie Mellon University Pittsburgh, PA 15213-3891 during the week of 21-27 January 2010 The holder of this note will receive $100.00 cash Only valid if signed and notarized
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4 Today In 1 Year indifferent Time and Money Today In 1 Year indifferent 50.00 $ 100.00 $ 100 x (1+.10) 50 / (1+.10) 110.00 $ 45.45 $
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5 Engineering Economics Why “engineering”? Economic Analysis Corporate Finance Capital Budgeting The tools and models used to evaluate  investments in both physical and  financial assets (especially physical)
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6 Value Over Time Now vs Later $100 now is worth $100 now, but what would  $100 in 1 year be worth? Two concepts: Indifference: What would I need to receive in 1 year  to give up $100 for certain today? Arbitrage: Through some trade, what could I assure  myself of getting in 1 year with a $100 investment  today? Indifference allows for risk preferences; arbitrage is  risk-neutral
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7 Time Value of Money in Action -40% -30% -20% -10% 0% 10% 20% 30% 40% 1701 1751 1801 1851 1901 1951 2001 Year Inflation Rate
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8 Time and Money: Postage
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9 Time and Money: Salaries
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10 Time and Money: Gasoline Average Gasoline Prices as of March of Each Year Constant 2001 Dollars $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 1918 1928 1938 1948 1958 1968 1978 1988 1998 2001$/gallon Commodity Cost Taxes (2001$)
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11 Arbitrage and Fair Returns Arbitrage = Free Money, Riskless Profit Why should future money be worth less  (or no more) than current money? Opportunity costs (“preferred habitat”) Inflation (“rational expectations”) Liquidity (“liquidity preference”) Could the opposite ever be true?
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12 Value of Money over Multiple Years Today In 2 Years indifferent 100.00 $ 100 x (1+.10) 121.00 $ 110 x (1+.10) 110.00 $ In 1 Year 100 x (1+.10) x (1+.10) or 100 x (1+.10)^2
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13 Bringing Future to the Present 45.45 x (1+.10) Today In 2 Years indifferent 50.00 $ 50 / (1+.10) 45.45 $ In 1 Year (50 / (1+.10)) / (1+.10) or 50 / (1+.10)^2 41.32 $
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14 Extension to Multiple Periods “Money makes money, and the money that money  makes makes more money” Compounding Now = 100 In one year: 100 × (1 +  r ) But, in the second year: [100 × (1 +  r )] × (1 +  r ) You get to earn a return on the first year’s return  in addition to your original capital!
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This note was uploaded on 09/20/2010 for the course SDS 88223 taught by Professor Fischbeck during the Spring '10 term at Carnegie Mellon.

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Lecture 2 NPV 2010 - Lecture 2 DADSS Engineering Economics...

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