September 28, 2004
Business Investment Decisions
There are two equivalent investment criteria. Make an investment if and only if
(1) The present value of the benefits is at least as large as the present value of the costs.
or
(2) The rate of return is at least as large as the interest rate on borrowed money.
We used the decision to invest in a college education to illustrate the first of these decision rules.
It makes a big difference if you allow for growth in income over time.
