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Unformatted text preview: ! (1+r) t => FV3 = $445.89 ! Therefore, we choose project B to get higher payoff. Method 3: Compare r ! What is return that project A offers? We know PV = $335, FV3 = $400, t = 3 Plug in the unknowns into the formula: r = (FV t /PV) 1/t – 1 => r= 6.09% ! Therefore, project A offers a lower return and you want to choose project B. Method 4: Compare t ! If you invest $335 in project B, how long does the money grow into $400? We know PV=$335, FV3=$400, r=10% Plug the known variables in the formula: t = [ln(FV t ) – ln(PV)] / ln(1+r) => r= 1.86 ! You can receive $400 earlier if you invest in B. We know that cash flow in an earlier date is more valuable than the same cash flow in a later date. Therefore, you want to choose project B....
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This note was uploaded on 12/12/2010 for the course FIN 300 taught by Professor Mishra during the Fall '08 term at University of Michigan.
 Fall '08
 mishra
 Corporate Finance

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