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The Economics of Business ValuationTowards a Value Functional Approach$
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Patrick Anderson

Print publication date: 2013

Print ISBN-13: 9780804758307

Published to Stanford Scholarship Online: September 2013

DOI: 10.11126/stanford/9780804758307.001.0001

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The Failure of the Neoclassical Investment Rule

The Failure of the Neoclassical Investment Rule

Chapter:
(p.23) 3 The Failure of the Neoclassical Investment Rule
Source:
The Economics of Business Valuation
Author(s):

Patrick L. Anderson

Publisher:
Stanford University Press
DOI:10.11126/stanford/9780804758307.003.0003

This chapter presents telling evidence that the value of a firm is not the net present value of its expected profits. This is a provocative statement, and deserves careful support: the notion that the value of investments in firms is the expected net present value of their earnings is a pillar of Finance. The author summarizes the intellectual history of this notion, and then presents six major failings of the “NPV rule,” in particular, that decision-makers often don’t follow this rule.

Keywords:   Net Present Value, NPV rule, neoclassical investment rule, Modigliani-Miller, real options, entrepreneurs, Finance

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