Ch06_New_Economy_Transport

Ch06_New_Economy_Tra - http/books.google.com/books id=eKF8IBCwfy4C&pg=PA124&lpg=PA124&dq=Solution To"New Economy

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http://books.google.com/books? %22New+Economy+Transport 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 looks at costs over 15 years for all options, but enters a terminal value at year 16 for the new boat. Assumptions about timing of cash flows have to be consistent and
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This note was uploaded on 01/09/2011 for the course FINANCE 1 taught by Professor Jack during the Fall '10 term at Hofstra University.

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Ch06_New_Economy_Tra - http/books.google.com/books id=eKF8IBCwfy4C&pg=PA124&lpg=PA124&dq=Solution To"New Economy

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