Transcript Warm-up problems - Northwestern University

Warm-up problems
1. You receive $1 for n 2. If you pre-pay your
mortgage a bit, will the
years starting in year
total amount of your
t. What is the present
payments going to
value assuming a
interest go up or down?
discount rate of r?
Agenda
• DCF = discounted cashflow analysis
• NPV = net present value
net present worth in the book
• IRR = internal rate of return
Scale Example (N 5.4)
• You’re a low-level manager at a filling and
packaging line. You need a new scale to
measure out the styrofoam peanuts for the
packaging. Two options
– Cheap scale
– Expensive one
Projections
Cheap
Premium
Beginning
(investment)
-$2000
-$3000
During
(6 years)
$450/yr
$600/yr
End
(salvage
value)
$100
$700
Discount Rate
“external rate of return”
“Minimum Attractive Rate of Return”
(MARR)
NPV
• Cheap NPV
= -$2000 + $450/8% (1-1.08-6) + $100*1.08-6
= $143
• Expensive NPV
=-$3000 + $600/8% (1-1.08-6) + $700*1.08-6
= $215