INVESTMENT OPPORTUNITY PRINCIPLES

Our farmer would prefer to invest at 4.5 per cent by lend-ing in the first four years $450, $450, $150, $50 rather thansacrifice these same amounts for 4.2 per cent by givingup farming for forestry. To induce him to make a change,the rate of return over cost must exceed the rate of in-terest. 2

Thus, by employing the concept of a rate of return overcost, we may restate the investment opportunity principleof maximum present value, or the principle of com-parative advantage, as the principle of greatest returnover cost. So stated the principle is:

Out of all possible options open to a person that par-ticular one is selected, the comparison of which with anyother option affords a rate of return over cost equal toor greater than the rate of interest.

§5. Marginal Rate of Return Over Cost

Next let us apply this statement of principle to the casein which the range of choice is not confined to a fewdefinite options, but extends to an infinite number vary-ing by continuous gradations. This case is really morelike the facts of life than the imaginary case of a fewfixed options, such as the farming, mining, or forestryuses of land. In fact, each of these three uses is in actual

3 In case the advantages (returns) precede the disadvantages (costs),as is the case when the merits of the mining use are compared withthose of the farming use, the proposition must be reversed, as follows:The earlier advantage will be chosen only in case the rate of futurecosts over present returns is less than the rate of interest. In such acase it would be more convenient, in comparing the two options, toregard them in the reverse order, that is, to consider the advantages ofthe farming use over the mining use, so that the disadvantages maycome first, i.e., the investment precede the returns. As long as the costsalways precede the returns, we need only to consider whether or notthe rate of return over cost exceeds the rate of interest.

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