Accelerated Finance

What is the Valuation Principle?

The value of an asset to the firm or its investors is determined by its competitive market price. The benefits and costs of a decision should be evaluated using these market prices, and when the value of the benefits exceeds the value of the costs, the decision will increase the market value of the firm.

What is the NPV decision rule?

The NPV decision rule states that when choosing among alternatives, we should take the alternative with the highest NPV. Choosing this alternative is equivalent to receiving its NPV in cash today.

Why doesn’t the NPV decision rule depend on the investor’s preferences?

Regardless of our preferences for cash today versus cash in the future, we should always maximize NPV first because we can always borrow/lend to shift cash forward or back.

What is a Normal Market?

A competitive market in which there are no arbitrage opportunities

What is the Separation Principle?

Security transactions in a normal market neither create nor destroy value on their own. Therefore, we can evaluate the NPV of an investment decision separately from the decision the firm makes regarding how to finance the investment or any other security transactions the firm is considering.

What is a Competitive Market?

one in which a good can be bought and sold at the same price