The Rational Rule for Investors

Owen could spend money on buying a still to make more gin, or he could put that money in the bank and earn interest on it. This is why we look at the present value of the costs and benefits associated with an investment. We call this the rational rule for investors. If you have to pay for your new equipment up front, then the presentvalue of the cost is simply the cost of the investment. The tricky part is that the extra revenue will all come in the future. So we need to make those present value adjustments to account for that.