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Present Value, The Objectives of The Firm, and Corporate Governance
Present Value, The Objectives of The Firm, and Corporate Governance
Chapter 2
Eighth Edition
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Topics Covered
Introduction to Present Value Foundations of the Net Present Value Rule Corporate Goals and Corporate Governance
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Future Values
Future Value of Rs.100 = FV
FV Rs.100 (1 r )
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Future Values
FV Rs.100 (1 r )
Example - FV
t
What is the future value of Rs.400,000 if interest is compounded annually at a rate of 5% for one year?
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Present Value
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Present Value
Discount Factor = DF = PV of Rs.1
DF
1 (1 r ) t
Discount Factors can be used to compute the present value of any cash flow.
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PV
C1 (1r )
420 (1.05)
400
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In the project listed below, the foregone investment opportunity is 12%. Should we do the project?
profit 420,000 370,000 Return .135 or 13.5% investment 370,000
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Economy Payoff
Slump
Normal
Boom
80, 000 110, 000 140, 000 Expected payoff C1 Rs.110, 000 3
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expected profit 110 95.65 Expected return .15 or 15% investment 95.65
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expected profit 110,000 100,000 Expected return .10 or 10% investment 100,000
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60
40
Bn
20
20
40 60 income in period 0
80
100
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194
G invests Rs.185 now, borrows Rs.200 and consumes now. Rupees Now
185
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200
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3 17 22 71 76 40 60 80
97 83 78 29 24 20
100
120
% of responses
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3 40 41
97 60 59 89 89 40 60 80 100 120
11 11 20
% of responses
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