Techniques of Project Appraisal ARNOLD C. HARBERGER UNIVERSITY OF CHICAGO In this paper‚ I attempt to bring into focus what I believe to be some of the important practical issues that face development planners in the field of project appraisal. I shall try‚ insofar as possible‚ to recognize the handicaps under which planners operate‚ most importantly the handicaps imposed by imperfect foresight and by the virtual necessity of decentralized decision-making. To elaborate briefly on these
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90= 3‚000‚000 C = $303‚107.83 2. You have just taken out a mortgage for $575‚000‚ at a fixed rate of 4.75% per year‚ compounded monthly‚ and a term of 30 years. a) Calculate the monthly payments The payments must discount to a value that is equivalent to $575‚000 today‚ assuming a monthly rate of (4.75%/12)‚ or 0.39583% per month‚ for 360 months. C * Annuity discount factor (0.39583%‚360) = 575‚000 C * 191.70 = 575‚000 C = $2‚999.47 b) For the first six months’
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of a put option receives money for the obligation to buy.... 3. The intrinsic value of a call option is Max [S – E‚0]. It is the value of the option at expiration. 4. The value of a put option at expiration is Max[E – S‚0]. By definition‚ the intrinsic value of an option is its value at expiration‚ so Max[E – S‚0] is the intrinsic value of a put option. 5. The call is selling for less than its intrinsic value; an arbitrage opportunity exists. Buy the call for $10‚ exercise the call by paying
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Chapter 2 Opportunity cost of capital – rate of return expected to be received from alternate investments forgone. NPV – Present value of cash flows less the cost of acquiring the asset acquire assets with positive NPV‚ positive NPV = good project Rate of Return = profit/cost or investment (good investments have higher rate of return than opportunity cost) Higher discount rate ( lower discount factor (lower NPV Investment Decision Rules: 1. accept if positive NPV 2. accept
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CHAPTER 5 TIME VALUE OF MONEY (Difficulty Levels: Easy‚ Easy/Medium‚ Medium‚ Medium/Hard‚ and Hard) Please see the preface for information on the AACSB letter indicators (F‚ M‚ etc.) on the subject lines. Multiple Choice: True/False (5-2) Compounding 1. F J Answer: aEASY Starting to invest early for retirement increases the benefits of compound interest. a. True b. False (5-2) Compounding 2. F J Answer: bEASY Starting to invest early for retirement reduces the benefits
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(b) Yield curve graph 10 3. Valuation of the shares for Lloyds Company 11 Valuation Methods 12 Earnings based method 12 Asset based method 12 Discounted Cash flow methods i.e. (free cash flow or Dividend valuation method) 13 4. Evaluation of stock value results 14 Asset-based approach 14 References 16 APPENDIX 17 Appendix 1 17 Appendix 2 18 INTRODUCTION Lloyds banking group is a produce of the fourth oldest bank in the United Kingdom which began in 1975 when Lloyds bank was founded. It was formed
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these decisions that people at one point thought of as a level of education only few are able to attain. In time that perspective has changed and in recent calculations the number of MBA graduates has increased by 250% (Articlesbase‚ 2006). In the closing case‚ we address the questions below to help Ben with his MBA decision. Question 1 How does Ben’s age affect his decision to get an MBA? Time plays a huge factor in Ben’s decision to get his MBA and to be able to make $100‚000 a year along with the
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takeover * Shareholder Value * The price at which the stock would sell if all investors had all knowable information about a stock. * The primary financial goal of management is shareholder wealth maximization‚ which translates to maximizing stock price. * Value of any asset is present value of cash flow stream to owners. * Most significant decisions are evaluated in terms of their financial consequences. * Stock prices change over time as conditions change
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t-years and not periods and kc-discount Rate Relation between EAR and kC:kEAR=ekC-1 ‚ kC=ln(1+kEAR) Present/future Value Additives: Cash flows at a particular time. Invest:NPV>0 Present Value of Annuities: V0=CF1- 11+knk=CF[PVIFAk;n] = Present Value of Perpetuities:V0=CFk 1k=PVIFAk‚n≡Annuity‚ n→∞ Future Values of Annuities:Vn=V0*FVIFk‚n=CF*PVIFAk;n*FVIFk;n=CF*FVIFA(k;n) FVIFAk;n=1+kn-1k Annuities Due: PVIFAduek;n=1-11+knk(1+k)
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b. people make decisions regarding resource allocation over time and how to handle risk c. people decide whether or not to become risk averse. d. society can reduce aggregate risk. ANSWER: b. how people make decisions regarding resource allocation over time and how to handle risk TYPE: M DIFFICULTY: 1 SECTION: 14.0 2. If you put $300 in an account paying 2 percent interest‚ what is the future value of this account in two years? a. $310 b. $312
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