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Unformatted text preview: ve-NPV projects, because accepting them would reduce the value of
the firm, whereas rejecting them has no cost (NPV 0).
If the NPV is exactly zero, then you will neither gain nor lose by accepting the project
instead of rejecting it, which also has an NPV of zero. It is not a bad project because it
does not reduce the firm’s value, but it does not add value to the firm either. E X A MPLE 3 .5
The NPV Is Equivalent
to Cash Today Problem
After saving $1500 waiting tables, you are about to buy a 50-inch plasma TV. You notice that
the store is offering a “one-year same as cash” deal. You can take the TV home today and
pay nothing until one year from now, when you will owe the store the $1500 purchase price.
If your savings account earns 5% per year, what is the NPV of this offer? Show that its NPV
represents cash in your pocket.
You are getting something (the TV) worth $1500 today and in exchange will need to pay $1500
in one year. Think of it as getting back the $1500 you thought you would have to spend today
to get the TV. We treat it as a positive cash flow.
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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