Economics Dynamics Problems 125

Economics Dynamics Problems 125 - Discrete dynamic systems...

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Unformatted text preview: Discrete dynamic systems 109 (a) FV = A (1 + r ) n 1 r = 1000 (1 + . 065) 10 1 . 065 = 13494 . 40 (b) PV = A 1 (1 + r ) n r = 1000 1 (1 + . 065) 10 . 065 = 7188 . 83 Discounting is readily used in investment appraisal and costbenefit analysis. Suppose B t and C t denote the benefits and costs, respectively, at time t . Then the present value of such ows are B t / (1 + r ) t and C t / (1 + r ) t , respectively. It follows, then, that the netpresentvalue , NPV , of a project with financial ows over n-periods is NPV = n t = B t (1 + r ) t n t = C t (1 + r ) t = n t = B t C t (1 + r ) t Notice that for t = 0 the benefits B and the costs C involve no discounting. In many projects no benefits accrue in early years only costs. If NPV > 0 then a project (or investment) should be undertaken. Example 3.9 Bramwell plc is considering buying a new welding machine to increase its output....
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This note was uploaded on 12/14/2011 for the course ECO 3023 taught by Professor Dr.gwartney during the Fall '11 term at FSU.

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