FIN 310 Chapter 3

https://ndusbpos-my.sharepoint.com/:x:/g/personal/mya_kruzel_ndus_edu/IQBECNoT-iglQ5r6crWVtBH6ASny6Mj0Ri0GVjVjt1kEhcY?e=ruzgpd

Cost-Benefit Analysis Quantifying Costs and Benefits

any decision in which the value of the benefits exceeds the costs will increase the value of the firm

Financial Manager Role

make decisions on behalf of the firm’s investors

Competitive Market

a good can be bought and sold at the same price

What does price determine?

the value of the good

• personal opinion is irrelevant

Law of One Price

in competitive markets, securities that produce exactly the same cash flows must have the same price

Arbitrage

the practice of buying and selling equivalent goods to take advantage of a price difference

Arbitrage Opportunity

any situation in which it is possible to make a profit without taking any risk or making any investment

The Time Value of Money

the difference in value between money today and money in the future

Interest Rate (r)

the rate at which money can be borrowed or lent over a given period

Depositing money

convert money today into money in the future

Borrowing money

exchange money in the future for money today

Interest Rate Factor (1 + r)

the rate of exchange between dollars today and dollars in the future

Investment’s Net Value Today

the difference between the cost of the investment and benefit in one year

Present Value

the value of a cost or benefit computed in terms of cash today

Future Value

the value of a cash flow that is moved forward in time

Discount Rate

the appropriate rate to discount a cash flow to determine its value at an earlier time

Discount Factor

the value today of a dollar received in the future