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Unformatted text preview: bank is offering new customers a free iPod nano if they open a new chequing account 03_ch03_berk.indd 71 and make two deposits. Assume the retail price of that model of nano was $159. Because there is no competitive market to trade iPods, the value of the nano depends on whether you were going to buy one or not. If you planned to buy a nano anyway, then the value to you of the nano is $159, the price you would otherwise pay for it. In this case, the value of the bank’s offer is $159. But suppose you do not want or need a nano. If you were to get it from the bank and then sell it, the value of taking the deal would be whatever price you could get for the nano. For example, if you could sell the nano for $100 to your friend, then the bank’s offer is worth $100 to you. Thus, depending on your desire to own a new nano, the bank’s offer is worth somewhere between $100 (you don’t want a nano) and $159 (you definitely want one). 12/15/11 8:08 PM 72 Part 2 Interest Rates and Valuing Cash Flow...
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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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