Foundations of the Net Present Value Rule

Capital Markets - Current vs Future consumption

example: investment returns 14% at end of year, 7% interest rate

Option A - invest $100 now and receive $114 at end of year

Option B - invest $100 and receive $106.54 ($114 x 1.07) now

B is borrowing against future income

Net Present Value Rule - investe in any project with a positive net present value

Rate of Return Rule - invest as long as the return on the investment exceeds the rate of return an equivilant investment in capital markets.