The Mathematics of Money

564

Evaluating

Projected

Cash Flows

“Foul cankering rust the hidden treasure

frets

But gold that’s put to use more gold

begets”

—William Shakespeare, “Venus and Adonis”

Learning Objectives

LO 1 Calculate present values when payment continues

indefi nitely into the future.

LO 2 Use present values to choose between different

business or investment opportunities.

LO 3 Calculate the payback period from an investment.

LO 4 Use payback periods to determine whether or not

an investment is worthwhile.

Chapter Outline

14.1 The Present Value Method

14.2 The Payback Period Method

14.1 The Present Value Method

Deciding what value to place on an investment or on a business as a whole is a challeng-

ing proposition. In addition to taking into account all the risks and uncertainties of any

opportunity, we must face the fact that most business ventures require substantial up-front

investment of time, effort, and capital in the hopes of returning profits in the future. How

can we decide whether or not a given business opportunity is financially worthwhile?

That is an enormous question that faces everyone, ranging from the multimillionaire real

estate developer considering building a new resort complex, to the pizzeria owner decid-

ing whether or not to buy a new oven, to the student wondering whether or not the time,

effort, and expense of pursuing a college degree will really ever pay off. There is of course

no way to provide a set, guaranteed, one-size-fits-all method for making these decisions.

However, in this chapter we will consider how some mathematical tools may help in

approaching these sorts of decisions.

CHAPTER

14