This preview shows page 1. Sign up to view the full content.
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
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...
View Full Document
- Spring '07