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Unformatted text preview: alternatives, you would choose the one with the highest NPV:
operate normally for one year and then sell. NPV and Cash Needs
When we compare projects with different patterns of present and future cash flows, we
may have preferences regarding when to receive the cash. Some people may need cash
today; others may prefer to save for the future. In our coffee stand example, operating
normally for one more year and then selling has the highest NPV. However, this option
does require an initial outlay for supplies (as opposed to selling the coffee stand and
receiving $20,000 today). Suppose we would prefer to avoid the negative cash flow today.
Would selling the business be a better choice in that case? 03_ch03_berk.indd
03_ch03_berk.indd 79 12/15/11 8:08 PM 80 Part 2 Interest Rates and Valuing Cash Flows
As was true for the jeweller in Section 3.2 considering trading silver for gold, the
answer is again no. As long as we are able to borrow and lend at the interest rate, operating for one more year is superior, whatever our preferences regarding the timing of
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- Spring '07