This preview shows page 1. Sign up to view the full content.
Unformatted text preview: ject the investment: if we took it, the firm would be $2000 poorer in one year
than if we did not.
Value of $100,000 Investment Today. The previous calculation expressed the value
of the costs and benefits in terms of a future value amount: dollars in one year.
Alternatively, we can use the interest rate factor to convert to a present value amount:
dollars today. Consider the benefit of $105,000 in one year. What is the equivalent
amount in terms of dollars today? That is, how much would we need to have in the
bank today so that we would end up with $105,000 in the bank in one year? We find this
amount by dividing by the interest rate factor:
Benefit ($105,000 in one year) ÷ (1.07 $ in one year/$ today)
$98,130.84 today present value (PV ) The
value of a cost or benefit
computed in terms of cash
today. This $98,130.84 amount is called a present value (PV ). For a one-period case, the
present value is calculated as follows:
PV0 5 C1 4 1 1 1 r 2 5 C1
5 C1 3
11 1 r2
11 1 r2 (3.2) where PV0 is the present v...
View Full Document
- Spring '07