9780321818171_berk_ch03

26 extra cash in your pocket today and no future net

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Unformatted text preview: In one year: $550 (from project) $509.26 $9.26 1.08 (loan balance) $0 This transaction leaves you with exactly $9.26 extra cash in your pocket today and no future net obligations. So taking the project is similar to having an extra $9.26 in cash up front. Thus, the NPV expresses the value of an investment decision as an amount of cash received today. As long as the NPV is positive, the decision increases the value of the firm and is a good decision regardless of your current cash needs or preferences regarding when to spend the money. 03_ch03_berk.indd 03_ch03_berk.indd 77 12/15/11 8:08 PM 78 Part 2 Interest Rates and Valuing Cash Flows The NPV Decision Rule NPV decision rule When choosing among investment alternatives, take the alternative with the highest NPV. Choosing this alternative is equivalent to receiving its NPV in cash today. As shown in the last example, the Valuation Principle implies that we should undertake projects with a positive NPV. That is, good projects are those for which the present value of the benefits excee...
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