This 9813084 is also the amount the bank would lend

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: alue now (at time 0), C1 is the cash flow in one year (at time 1), and r is the interest rate. This $98,130.84 is also the amount the bank would lend to us today if we promised to repay $105,000 in one year.2 Thus, it is the competitive market price at which we can “buy” or “sell” $105,000 in one year. 2 We are assuming the bank is willing to lend at the same 7% interest rate, which would be the case if there were no risk associated with the cash flow. 03_ch03_berk.indd 03_ch03_berk.indd 74 12/15/11 8:08 PM Chapter 3 The Valuation Principle: The Foundation of Financial Decision Making Today Value of Cost Today Value of Benefit Today 75 One Year $100,000 $105,000 105,000 1.07 $ 98,130.84 Now we are ready to compute the net value of the investment by subtracting the cost from the benefit: $98,130.84 $100,000 $1869.16 today Once again, the negative result indicates that we should reject the investment. Taking the investment would make the firm $1869.16 poorer today because it gave up $100,000 for something worth only $98,130.84. Present Versus Future Value. This calculation demonstrates that our decision is the same whether we express the value of the investment in terms of the future value amount (dolla...
View Full Document

This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at Arizona.

Ask a homework question - tutors are online