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probability. An investor who is risk-averse prefers the safe


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determining the best investment choices, selected from the


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large universe of available investment projects, becomes a


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your corporation’s owners (investors). The cost of capital


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still measures the same thing: whether your investors have


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longer self-contained islands.


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better alternatives elsewhere in the economy. If they do,


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you should return their capital to them and let them invest
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how your corporate projects work together with your other


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their money there. The opportunities elsewhere determine


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projects (for internal corporate risk management) or even


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with your investors’ projects elsewhere. This also means


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what projects you should take.


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that you need to first understand your investors’ problems


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to undertake. So, who are your investors, what do they


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like and dislike, and how should you evaluate your project In sum, we now assume that investors are risk-averse—
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relative to what you believe your investors’ alternatives are? as they


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What exactly are your investors’ alternatives? How do your E r , the opportunity cost of capital, in the NPV formula?
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projects interact with your investors’ other projects? This As in earlier chapters, great opportunities elsewhere in the
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is a wide and deep subject, which is why we require an un- economy still manifest themselves as a high cost of capital
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