Chapter 6: Investment Decisions

An investment consists of spending money or other resources (e.g., time) with the aim of receiving benefits later.

INVESTMENT → BENEFITS

(now)  (later)

Depositing money in an interest-bearing account is an investment. The purchase of a bond or treasury bill is an investment. Also, company projects such as the purchase and installation of equipment, the development of new products and increasing inventory held for sale are investments.

In this chapter we consider the problem of deciding whether or not an investment is worthwhile and deciding which investments are preferable to others.

We view the financial aspect of an investment as being entirely determined by the cash flows associated with it by how much money is spent and received and when it is spent and received.

To (substantially) simplify the analysis we will omit tax considerations and view the expected cash flows of projects as being certain. Our methods and calculations will be similar to cases with taxes and risks included, but will be less complex.