Net present Value Example continued If the building is being offered for sale at a price of $350,000, would you buy the building and what is the added value generated by your purchase and management of the building? 16.00016000466.000 NPp=-350.000+ (107)(107)2(107)3 NP=$59,323 Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 6- 11 Irwin/McGraw-Hill Net Present Value Example - continued If the building is being offered for sale at a price of $350,000, would you buy the building and what is the added value generated by your purchase and management of the building? NPV NPV = − + + + = 350 000 1 6 000 1 0 7 1 6 000 1 0 7 466 000 1 0 7 323 1 2 3 , , ( . ) , ( . ) , ( . ) $59
6-12 Other Investment criteria nternal Rate of Return (Irr)-Discount rate at which nPv=0 Rate of return Rule- Invest in any project offering a rate of return that is higher than the opportunity cost of capital C-investment Rate of return investment Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 6- 12 Irwin/McGraw-Hill Other Investment Criteria Internal Rate of Return (IRR) - Discount rate at which NPV = 0. Rate of Return Rule - Invest in any project offering a rate of return that is higher than the opportunity cost of capital. Rate of Return = C -investment investment 1