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Dfds

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Submitted By junnn92
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i = 0 / PV=FV

As i increases, the higher is the OCW and the lower the PV
If i is low, OCW lower, higher PV*
Relationship between i and PV is inverse, i and OCW is direct

Find PV of each and add them up

NPV Rule (best rule)
Can be used in any business decision
FVs = present value through years n (future profit/revenue?)
C0 = current spending

So if NPV > 0 / accept the project

* NPV zero is long-run perfect competition * Oligopoly – NPV positive * NPV is positive free entry * Dry cleaning is NPV zero * * PV Perpetuity * Perpetuity = somebody is offering me fixed dollar forever * fixed cash flow forever * ex. Type of government bond * when they want to finance huge project * * ex. ) CF = 100 * value of some of the hundreds are just few cents (CFs as years increases) * * Test? How come in infinite series has a finite answer? * * Firm Valuation and Profit Max * Maximize profit = PV of current and future * *Assumption = business that I buying is a mature business
This mature business is going to grow at constant rate (g)
Pit=Pit(1+g)^t
G has to be less than I (what you want (i) should be more than g)
Second formula!! pi0 has been paid ALREADY
If pi0 has not been paid then use first formula
Assmp1. Pi grows at constant rate
Assmp2. I is more than G * * Marginal Analysis * When you want to make a decision, look at marginal * You maximize MB=MC * Every decision depends on what is your input * * Chapter 6 * Spot Exchange * Advantage – specialization, avoids contracting costs, avoid costs of vertical integration * Disadvantage – possible “hold-up problem” * * Contracting * Advantage – * Skimping = not deal with poor material * Disadvantage – costly = short contract, rather than long since future is foggy

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