Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Atienza
BEC 113 – BAE
If the existing capacity is fully utilised It is clear that the marginal product of
then any further increase in demand will capital is a physical quantity similar to
be met with by making fresh investment the marginal product of any other factor.
on new capital equipment. The MEI is a percentage rate, and not
the physical quantity. Again the marginal
5. Level of current investment: product of capital does not involve
expectations about the yield from the The relationship between MEC and MEI
unit of capital during the remainder of its is illustrated in the figure 1.:
life. But the MEI is very much concerned
with such expectations about the yield.
The above analysis of the behaviour of The diagram and the table given below
investors in respect of new investment is give us the shape of the investment
conceived in the context of the schedule demand schedule:
of the marginal efficiency of capital or
Investment Demand Schedule. It shows
a functional relationship between the
MEC and the amount of investment
indicating that the demand for capital
asset of any given type is a downward
sloping function of the marginal
efficiency of capital.
physical unit of capital. In other words,
MPC is related with an increment of
value due to the employment of one
more value unit of capital. On the other
hand, Keynes used the term MEC to
denote the rate of return over cost,
using the term ‘prospective yields’ for
the series of absolute prospective
returns from a capital good. The
We find that when the investment is Rs.
marginal product of capital can be gross
2,000, the MEC is 12%. As the
or net. It is gross if estimated before
investment increases, the MEC declines
deducting depreciation otherwise it is
and finally it is 2% at Rs. 12,000. The
net; while MEC is the rate of discount
MEC curve is downward sloping,
which equates the gross marginal
showing that the MEC declines with an
product with replacement cost of the
increase in investment. Figure 18.2
capital asset.
depicts the investment demand curve or
what is also called the MEC schedule 2. MPC is related with the increment of
and shows the inverse relationship value obtained by using an additional
between investment and the MEC. quantity of capital in the existing
situation. MEC relates to the series of
Marginal Productivity of Capital and
increments which it is expected to obtain
Marginal Efficiency of Capital (MPC and
over the whole life of the additional
MEC):
capital assets. Symbolically, the MPC is
Keynes condemned the use of the concerned with Q and the MEC with
marginal productivity of capital (MPC) complete series Q1, Q2, Q3, …, Qr.
and instead used the term marginal Thus, MEC involves the significance of
efficiency of capital (MEC). expectations.
The difference between the two is as 3. In defining the MPC, attention is given
follows: to the current marginal product, i.e., that
absolute annual product, after deducting
1. The term MPC is used by the running expenses and depreciation
economists to denote an increment of allowances, while Keynes estimated the
physical product per unit of time on MEC as the net return over cost
account of the employment of one more throughout the whole expected life of
the capital good—the net aggregate deducting depreciation otherwise it is
return is obtained after deducting the net; while MEC is the rate of discount
running expenses only and not which equates the gross marginal
depreciation. Thus, while the term MPC product with replacement cost of the
refers to the expected current product, capital asset.
the later refers to the anticipations with
respect to the whole series of 2. MPC is related with the increment of
prospective yields from a capital asset. value obtained by using an additional
quantity of capital in the existing
Marginal Productivity of Capital and situation. MEC relates to the series of
Marginal Efficiency of Capital (MPC increments which it is expected to obtain
and MEC): over the whole life of the additional
capital assets. Symbolically, the MPC is
Keynes condemned the use of the concerned with Q and the MEC with
marginal productivity of capital (MPC) complete series Q1, Q2, Q3, …, Qr.
and instead used the term marginal Thus, MEC involves the significance of
efficiency of capital (MEC). expectations.
The difference between the two is as 3. In defining the MPC, attention is given
follows: to the current marginal product, i.e., that
absolute annual product, after deducting
1. The term MPC is used by the
running expenses and depreciation
economists to denote an increment of
allowances, while Keynes estimated the
physical product per unit of time on
MEC as the net return over cost
account of the employment of one more
throughout the whole expected life of
physical unit of capital. In other words,
the capital good—the net aggregate
MPC is related with an increment of
return is obtained after deducting the
value due to the employment of one
running expenses only and not
more value unit of capital. On the other
depreciation. Thus, while the term MPC
hand, Keynes used the term MEC to
refers to the expected current product,
denote the rate of return over cost,
the later refers to the anticipations with
using the term ‘prospective yields’ for
respect to the whole series of
the series of absolute prospective
prospective yields from a capital asset.
returns from a capital good. The
marginal product of capital can be gross
or net. It is gross if estimated before
Net Present Value to a project if the NPV is positive; say no
if NPV is negative. As a tool for
NPV and IRR are two methods for choosing among alternates, the NPV
making capital-budget decisions, or rule would prefer the investment with the
choosing between alternate projects and higher positive NPV.
investments when the goal is to
increase the value of the enterprise and Companies often use the weighted
maximize shareholder wealth. Defining average cost of capital, or WACC, as
the NPV method is simple: the present the appropriate discount rate for capital
value of cash inflows minus the present projects. The WACC is a function of a
value of cash outflows, which arrives at firm's capital structure (common and
a dollar amount that is the net benefit to preferred stock and long-term debt) and
the organization. the required rates of return for these
securities. CFA exam problems will
To compute NPV and apply the NPV either give the discount rate, or they
rule, the authors of the reference may give a WACC.
textbook define a five-step process to be
used in solving problems: Example:
1.Identify all cash inflows and cash To illustrate, assume we are asked to
outflows. use the NPV approach to choose
between two projects, and our
2.Determine an appropriate discount company's weighted average cost of
rate (r). capital (WACC) is 8%. Project A costs
$7 million in upfront costs, and will
3.Use the discount rate to find the
generate $3 million in annual income
present value of all cash inflows and
starting three years from now and
outflows.
continuing for a five-year period (i.e.
years 3 to 7). Project B costs $2.5
4.Add together all present values. (From
million upfront and $2 million in each of
the section on cash flow additivity, we
the next three years (years 1 to 3). It
know that this action is appropriate
generates no annual income but will be
since the cash flows have been indexed
sold six years from now for a sales price
to t = 0.)
of $16 million.
5.Make a decision on the project or
investment using the NPV rule: Say yes
For each project, find NPV = (PV in years 1 to 3, which fit the definition of
inflows) - (PV outflows). an annuity.