Once we quantify all the costs and benefits of an

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Unformatted text preview: etitive market prices and interest rates to convert between dollars today and other goods, or dollars in the future. Once we quantify all the costs and benefits of an investment in terms of dollars today, we can rely on the Valuation Principle to determine whether the investment will increase the firm’s value. F I GUR E 3 .1 Converting Between Dollars Today and Gold or Dollars in the Future We can convert dollars today to different goods or points in time by using the competitive market price or interest rate. Once values are in equivalent terms, we can use the Valuation Principle to make a decision. Gold Price ($/oz) Ounces of Gold Today Gold Price ($/oz) Dollars Today (1 r) (1 r) Dollars in One Year Concept Check 03_ch03_berk.indd 03_ch03_berk.indd 76 7. How do you compare costs at different points in time? 8. Is the value today of money to be received in one year higher when interest rates are high or when interest rates are low? 12/15/11 8:08 PM Chapter 3 The Valuation Principle: The Foundation of Financial Decision Making 77 3.5 The NPV Decis...
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