LATEX

LATEX

Tuesday, March 31, 2020

Value & Capital, CHAPTER XV, Section 7

In this section, the final one of the chapter, the author discusses one additional characteristic of the dynamic production plan -- one that, he suggests, "ought perhaps to be reckoned among the stability conditions."  In addition to having a positive net present value initially, the investment plan must also have a positive net present value "at all future dates within the period for which he is planning."  If this were not the case, the planner would recognize that he would lose money by continuing, and he would cut the plan short.  The author notes that "The importance of this condition will emerge fully at a later stage."

He then discusses the ratio of the present value of a stream of capitalized values of a production plan at regular intervals (weeks, in his example) to the present value of the plan itself.  He notes that this ratio "is what we have called the average period of the stream of surpluses."  In an earlier section, he explained that this ratio can be thought of as the weighted average of lengths of times that payments are deferred from the present, with the times of deferment weighted by the discounted values of the payments.  He closes the section by noting that "The significance of this average period will come out when we discuss the effect of changes in interest on the production plan."