Okay, we talked about present value, net present value. And we talked about something called opportunity cost. So let's get a little bit more into opportunity cost of capital. And the question you ask yourself is should I invest in this project? I'm asking you this question. Should you invest in this project? So let's assume something. Let's assume that you are offered the chance to invest $100,000 today, assuming you have it. And depending upon how the economy goes, you have three possible results. If it is a bad economy, you would return $80,000 in one year and you [COUGH] Doesn't sound too great, right? [COUGH] You lost 20,000. If the economy is just bubbling along on kind of an average basis like it has been for the past several years, you return $110,000. Okay, better. And if the economy really booms, you return $140,000. So that's the three options you have. And if r the opportunity cost of capital is 15% would do you invest $100,00 given these three possible outcomes? That's the question, what's the answer? Let's take a look at the present value calculation and we should be able to figure this out straight forward. Present value as I said in previous discussions is one divided by one plus the discount rate, which is 15% in this example, times the future value to be returned by the project. I'm using 110,000 in this example, and why am I doing that? Well we know that we not going to do the 80,000 off the top right? That makes no sense. And we probably know that the economy is not going to boom, so we're going to take the middle case, the base case where I said we're going to return $110,000 on a $100,000 investment. So, if you calculate the present value, what's the present value of $110,000 one year from now, today, at a 15% discount rate or opportunity cost, that's $95,650. Okay, what did I tell you you had to invest to earn that present value? $100,000 right? So the net present value of that project would be the present value less the amount of investment required and you end up with a negative $4,350. Which means you should not invest, right? Simple as that. The same result would be found from doing that calculation I just did a minute ago where I took the value of the cash return minus the investment. So if you look at it, $110,000 is what the cash they returned, your $100,000 is what you invested, divided by 100,000 which is your investment so you made $10,000 divided by 100,000 investment, that's a 10% return. We already know that also the capital 15%. So it's a very simple way to do this calculation. Now there's some people who get confused about this next point and I want to try to explain what people think about financially. M&M thing right now. This is basically, let's say you're the investor and you don't have the $100,000, and a bank offers to loan you $100,000 at 8%. 8%, okay. Now, based upon, this company is so strong and I feel surely certain that you can repay this $100,000, and I'm prepared to loan you $100,000 at 8%. Does this change your cost of capital for the project to 8%? If so if it did, then when you would do the calculation, the present value at 8 percent, you would come up with a present value of $101,852. So the net present value would be $1,852, right? The present value plus the $100,000 investment, right? No, wrong. The 8% reflects the health of the company, not the health of their project. Okay. The companies are in a later term, the opportunity cost is still 15%. So the question you have to ask is look at it this way. Would you borrow money at 8% and invest it at 10% or 15%, all right. I mean that's pretty straightforward, right. I mean, the answer is obviously, you would be better investing the 15%, right. So you basically, if you get financing for a project, you don't say that project has a different R than the corporate R. And the corporate R is what governs this discussion, just so you'll be aware of that in the future. So we'll talk about that in a moment and get more involved in how debt and how interest and tax benefits actually have changed this imminent approach to conserving financially as part of our population.
