TABLE 2 - calculations. For example, the decision to invest...

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TABLE 2 Present Value of Jukebox at an Interest Rate of 6% Year Outlay (−) or income Present value calculation Present value of outlay (−) or income 0 −$7,000 −$7,000 1 2,000 $2,000/(1.06) 1 1,887 2 2,000 2,000/(1.06) 2 1,780 3 2,000 2,000/(1.06) 3 1,679 4 2,500 2,500/(1.06) 4 1,980 Total net present value: $326 At the lower interest rate, the net present value of the jukebox is positive ($326). If the firm can obtain  $7,000 in loanable funds at 6% interest, it will choose to purchase the jukebox. The decision to invest in other types of capital goods can also be made on the basis of present value 
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Unformatted text preview: calculations. For example, the decision to invest in human capital by attending college is based on the present value of the future income that an individual can earn with a college degree. If the present value is positive, the individual will choose to attend college. If the present value is negative, the individual will not attend college and will perhaps take a job instead....
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This note was uploaded on 11/19/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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