9780321818171_berk_ch03

9780321818171_berk_ch03

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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. Solution ◗ Plan 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. Cash flows: Today In o...
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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.

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