pvextra - Present Value and discount rates What is R? Econ...

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Present Value and “discount rates” What is R? Econ 71a: Spring 2007 Lecture 3.1(extra)
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Two Cases Have funds to invest, compare with other investments Borrow funds for project
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Problem Purchase condominium today for $50,000 Receive rent in years 1-2 of $1,000 Sell it in year 3 years for $50,000 Is this worth it? Interest is 5% per year
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Two Methods Use current funds to invest in building Compare these with some other 3 year investment “Interest” is return from alternative investment Borrow funds to invest Pay back loan in 3 years Pay back parts of the loan with rental payments “Interest” is borrowing interest rate
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Method 1: Compare Bank Account versus Condo FV ( Condo ) = (1000)(1.05)+(1000)(1.05) 2 +50000 FV ( Bank ) = 50,000(1.05) 3 FV ( Condo ) > FV ( Bank ) (1000)(1.05)+(1000)(1.05) 2 +50000 - 50000(1.05) 3 > 0 - 50000+ 1000 (1.05) + 1000 (1.05) 2 + 50000 (1.05) 3 > 0 NPV > 0
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Method 2: Borrow money Borrow 50,000 today Pay back 1000 in years 1 and 2 Repay rest of loan in year 3 Sell Condo
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This document was uploaded on 11/04/2011 for the course FIN 412 at North South University.

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pvextra - Present Value and discount rates What is R? Econ...

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