1.1 Investment decisions Objective Function of the Corporation Motivation Example 1 Suppose you are at a gm shareholders'meeting. Three of the shareholders there have very different ideas about what the firm should do Old lady Wants money now. Wants gm to invest in large cars since this would yield a quick profit Little boy's trust Wants money a long way in the future. Wants gm to invest in fund representative building electric cars Pension fund Wants money in the medium term. Thinks there will be a very serious oil crisis some time in that period. Recommends that GM build small cars What should gm do? We will see how to answer this question by looking at how an individual should make investment decisions. Once we see that we can see how a corporation should make investment decisions Example Bill ross has inherited $1M. He grew up in Europe and has developed a real aversion to work, which he completely detests. He therefore plans to use his inheritance to finance himself for the rest of his life. For simplicity we'll divide his life into two periods youth and old age. Also, we're going to assume that there is only one financial institution, a bank, which lends and borrows at a rate of 20%, so that for every dollar deposited in youth S1.20 is received in old age 33 1.1 Investment Decisions Objective Function of the Corporation Motivation Example 1 Suppose you are at a GM shareholders' meeting. Three of the shareholders there have very different ideas about what the firm should do. Old lady: Wants money now. Wants GM to invest in large cars since this would yield a quick profit. Little Boy's trust Wants money a long way in the future. Wants GM to invest in fund representative building electric cars. Pension fund Wants money in the medium term. Thinks there will be a very representative serious oil crisis some time in that period. Recommends that GM build small cars. What should GM do? We will see how to answer this question by looking at how an individual should make investment decisions. Once we see that we can see how a corporation should make investment decisions. Example Bill Ross has inherited $1M. He grew up in Europe and has developed a real aversion to work, which he completely detests. He therefore plans to use his inheritance to finance himself for the rest of his life. For simplicity we'll divide his life into two periods, youth and old age. Also, we're going to assume that there is only one financial institution, a bank, which lends and borrows at a rate of 20%, so that for every dollar deposited in youth $1.20 is received in old age