{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Investment decision rule

10 in fact choosing this optimal investment level the

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: words, invest up to the point where the slope of investment opportunities curve (this is called marginal rate of transformation, MRT) is equal to the slope of capital market line (which is –(1+r)). In this way, the firm can make sure that investors have the maximum amount of wealth, meaning that the capital market line is furthest away from the origin. 9. Investors now with the wealth generated by investment can transfer wealth (consumption) through time using capital markets. 10. In fact, choosing this optimal investment level (the point where MRT= ­(1+r)) is equivalent to an investment strategy where the firm takes all positive net present value (NPV) project. Also at the optimal level of investment, the total NPV is maximized. (That NPV is positive means that the present value of benefits exceeds the present value of costs.) 11. Let’s prove this equivalence. Suppose we found the optimal level of investment as I described...
View Full Document

{[ snackBarMessage ]}