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Ch06_New_Economy_Transport - http/books.google.com/books...

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http://books.google.com/books? id=eKF8IBCwfy4C&pg=PA124&lpg=PA124&dq=Solution+To+ %22New+Economy+Transport %22&source=bl&ots=YApsEvEXUY&sig=OKH0OmEKFM_n7Fcfj2sBeKjkoN8&hl=e n&ei=QpMpTebENZO54gassNTHCQ&sa=X&oi=book_result&ct=result&resnum=10& sqi=2&ved=0CFYQ6AEwCQ#v=onepage&q=Solution%20To%20%22New %20Economy%20Transport%22&f=false NEW ECONOMY TRANSPORT Principles of Corporate Finance 7 th Edition Richard A. Brealey and Stewart C. Myers This is an equipment replacement decision. The objective is to minimize the present value of future costs. But there are a few real-life complications. Some cash flows are stated in real terms, some in nominal terms. We will use a real discount rate for the real cash flows, a nominal rate for the nominal flows. The alternative is to convert all cash flows to real terms (using a real discount rate) or all to nominal (using a nominal rate). The new boat lasts longer (20 years) than the rehabilitated Vital Spark (15 years). Thus we calculate equivalent annual costs. The alternative analysis
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