-At any moment, firms have various investment opportunities which can be ranked on desirability basis.
-The firm can buy capital goods either by selling debt instruments (bonds, security paper) or by reducing its own money balances (using internal funds) or by share offer , debentures etc.
-The opportunity cost of funds raised internally is the relevant market rate of interest.
-Generally, a firm may be restricted in its borrowing by its overall net worth. However, this barrier is assumed nonexistent in this analysis.
-The net present value of an investment, therefore is the present value of the stream of net returns/revenues from the investment minus the current cost (or the present value of the cost) of making the investment.
-In the absence of capital (or time) limitations, the firm would undertake all potential investments with a positive present value.
NB: PV involves translating future values into present values.
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