Is the investment worthwhile?
If the machine (or other) costs less than the present value, it will be worth buying. However, if it costs more, the firm would be better off keeping its money in the bank and earning a rate of interest.
The difference between the present value of the benefits (PV ) of the investment and its costs (C) is known as the net present value (NPV).
2) Rate of return approach -
This rate of return is known as the firms 'marginal efficiency of capital' (MEC) or internal rate of return (IRR). The same formula is used as for calculating the PV.
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