INVESTMENT OPPORTUNITY PRINCIPLES

which have been developed, it seemed advisable not todistract attention from the essential features of the theoryby introducing it prematurely. The complication referredto is, after all, more intricate than important. It con-sists in the fact that not only, as we have seen, does thechoice between different optional income streams de-pend upon the rate of interest, but also that even therange of choice depends upon that rate. If the rate ofinterest is changed, a change is produced not only in thepresent values of the income items but in the incomeitems themselves.

The net income from any instrument or group of in-struments of wealth is the difference between the totalgross income and the outgo. But many of the elements,both of income and outgo, are materially dependent uponthe rate of interest. This is especially true of those itemsof income and outgo which are not final but merely inter-mediate or interactions . 7 In the case of interactions, achange in the rate of interest affects the income streamdirectly, because, as has been shown elsewhere , 8 the valu-ation of an interaction (i.e., intermediate service) in-volves the discount process and is therefore dependentupon the rate of interest. Thus, the iron yielded by aniron mine has its value determined in part by the dis-counted value of the machinery to be made of it andtherefore its value will be affected by a change in the rateby which this discount is reckoned.

For present purposes, it is only necessary to emphasizethe bare fact that the range of choice between differentincome streams is somewhat dependent upon the rate ofinterest. If the modification due to this fact were intro-

’ See Chapter I or The Nature oj Capital and Income, Chapters VII,VIII, IX, and X. ‘Ibid., p. 317.

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