chapter 4: Flashcards
The way we use the financial markets to aid us in making investment decisions is a direct consequence of what?
of our basic assumption that individuals can never be made worse off by increasing the range of choices open to them
An investment project is worth undertaking only if it does what?
how do we ensure this?
basically, the first principle of investment decision making
only if it increases the range of choices in the financial markets
To do this, the project must be at least as desirable as what is available in the financial markets
–> If it were not as desirable as what the financial markets had to offer, people could simply use the financial markets instead of undertaking the investment
basically, if you wanna try a project, make sure that it beats what the financial markets can give you as profit
twin features of the financial markets that enable us to make the right investment decision
- the financial markets can be used as a standard of comparison against which any investment project must measure up
- they can be used as a tool to help the individual actually undertake investments
why do we say that the value of an investment to an individual does not depend on consumption preferences?
what can these preferences dictate though?
because we only need to compare the investment with the financial markets to decide whether it is worth undertaking or not
these preferences can dictate whether the person borrows or lends
The NPV of an investment
a simple criterion for deciding whether or not to undertake it
answers the question of how much cash an investor would need to have today as a substitute for making the investment
If the net present value is positive, the investment is worth taking on because doing so is essentially the same as receiving a cash payment equal to the NPV
If the NPV is negative, taking on the investment today is equivalent to giving up some cash today, and the investment should be rejected
