ABSTRACT
Let us now consider three rather crude investment criteria, which, however, are commonly employed in the business sector, especially where the venture contemplated is risky.
2 The cut-off period is perhaps the crudest possible criterion that is used in business in order to decide whether or not to invest in a project. A suitable period is chosen over which the money invested must be fully recouped. The period could be ten years, though usually a shorter period such as five years or even less is chosen. Such a criterion may be justified in cases of innovation in products or methods that cannot be protected by a patent, and which innovations are likely to be copied by competing firms within two or three years. A cut-off period of
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years, further table, it is clear that a cut-off period of three years after the initial outlay would admit the A1 investment option. Indeed, more than the initial 100 is recouped in the first year after the outlay. The A2 option only just scrapes home. A3 would be able to recoup as much as 160 in the three years, while A4 would recoup 140. The shortcomings of this criterion are easy to perceive. If the returns were not
expected to accrue mainly in the first few years but mainly after the first few years, worthwhile projects would be rejected. A stream –100, 0, 0, 20, 40, 60, 80, 120, … would be rejected. So also would a stream –100, 20, 20, 20, 20, 20, 20, . . . .
