1. Warm-up problems 1.You receive $1 for n years starting in year t. What is the present value assuming a discount rate of r? 2.If you pre-pay your mortgage a bit, will the total amount of your payments going to interest go up or down?

2. Agenda DCF = discounted cashflow analysis NPV = net present value net present worth in the book IRR = internal rate of return

3. 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

4. Projections CheapPremium Beginning (investment) -$2000-$3000 During (6 years) $450/yr$600/yr End (salvage value) $100$700

5. Discount Rate “external rate of return” “Minimum Attractive Rate of Return” (MARR)

6. 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