Investment decision rule

Therefore there exists a tangent point between the

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Unformatted text preview: equal to –(1+r), which is obvious from the graph we drew. The two curves are tangent at the optimal investment level. That is, marginal investment return is equal to the opportunity cost of capital. That is, NPV is equal to zero. Therefore, the optimal level of investment is the point where a firm exhausts all its positive NPV investment projects. 12. Now let’s see why the optimal level of investment is the point where you maximize the total NPV of the firm. Take a look at the last graph I drew in the class. Suppose there are capital markets where you can borrow and lend money at an interest rate, r. (Therefore, the slope of the curve is –(1+r)) Call the point where the capital market line and X ­axis meets W0*. And t...
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This note was uploaded on 03/19/2013 for the course FINA 2010 taught by Professor Jessica during the Spring '13 term at HKU.

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