pvextra - T w o C ases P r e s e n t V a lu e a n d d is c...

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1 Present Value and “discount rates” What is R? Econ 71a: Spring 2007 Lecture 3.1(extra) Two Cases • Have funds to invest, compare with other investments • Borrow funds for project 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 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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2 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 Method 2: Borrow money • Borrow 50,000 today
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This note was uploaded on 01/02/2012 for the course FINANCE 347 taught by Professor Bayou during the Fall '11 term at NYU.

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pvextra - T w o C ases P r e s e n t V a lu e a n d d is c...

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