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future revenues of the PlayStation if they are delayed into an equivalent present value of those
revenues today. 03_ch03_berk.indd
03_ch03_berk.indd 75 12/15/11 8:08 PM 76 Part 2 Interest Rates and Valuing Cash Flows ◗ Execute
If the launch is delayed to 2006, revenues will drop by 20% of $2 billion, or $400 million, to
$1.6 billion. To compare this amount to revenues of $2 billion if launched in 2005, we must
convert it using the interest rate of 8%:
$1.6 billion in 2006 ÷ ($1.08 in 2006/$1 in 2005) $1.481 billion in 2005 Therefore, the cost of a delay of one year is
$2 billion $1.481 billion $0.519 billion ($519 million). ◗ Evaluate
Delaying the project for one year was equivalent to giving up $519 million in revenue. In this
example, we focused only on the effect on the first year’s revenues. However, delaying the
launch delays the entire revenue stream by one year, so the total cost would be calculated in
the same way by summing the cost of delay for each year of revenues. We can use the interest rate to determine values in the same way we used competitive market prices. Figure 3.1 illustrates how we use comp...
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