For example typical investment projects incur costs

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Unformatted text preview: isions, unlike in the examples presented so far, costs and benefits occur at different points in time. For example, typical investment projects incur costs up front and provide benefits in the future. In this section, we show how to account for this time difference when using the Valuation Principle to make a decision. 03_ch03_berk.indd 03_ch03_berk.indd 72 12/15/11 8:08 PM Chapter 3 The Valuation Principle: The Foundation of Financial Decision Making 73 The Time Value of Money Consider a firm’s investment opportunity with the following cash flows: Cost: Benefit: time value of money The difference in value between money today and money in the future; also, the observation that two cash flows at two different points in time have different values. $100,000 today $105,000 in one year Because both are expressed in dollar terms, are the cost and benefit directly comparable? Calculating the project’s net value as $105,000 $100,000 $5000 is incorrect because it ignores the timing of the costs and benefits. That is, it treats money today as...
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