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Unformatted text preview: ion Rule
In Section 3.4, we converted between cash today and cash in the future using the interest rate. As long as we convert costs and benefits to the same point in time, we can use
the Valuation Principle to make a decision. In practice, however, most corporations
prefer to measure values in terms of their present value—that is, in terms of cash today.
In this section, we apply the Valuation Principle to derive the concept of the net present
value or NPV, which we can use to define the “golden rule” of financial decision making,
the NPV decision rule. Net Present Value
net present value (NPV )
The difference between
the present value of a
project’s or investment’s
benefits and the present
value of its costs. When the value of a cost or benefit is computed in terms of cash today, we refer to it as
the present value (PV ). Similarly, we define the net present value (NPV ) of a project or
investment as the difference between the present value of its benefits and the present
value of its costs:
Net Present Value
PV(Benefits) NPV PV(Costs) (3.3) Let’s consider a simple example. Suppose your...
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This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at University of Arizona- Tucson.
- Spring '07