Financial Management: Principles and Applications, 13/e

11.2 Net Present Value

In the introduction to this chapter, we described a simple investment opportunity involving the purchase and sale of a condo. The $8,000 difference between the $100,000 cash inflow from the sale of the condo and the $92,000 investment outlay (the $90,000 cost of buying the condo from your landlord plus $2,000 in painting and repair expenses) is the incremental effect of the investment on your personal wealth. Because both the inflow from the sale and the outflows related to buying and fixing up the condo were only three weeks apart, we ignored the time value of money and compared the inflows directly to the outflows. We determined that the investment is a sound undertaking because it can be sold for more than it cost. ...