Economics 101 question


Let’s say you have a box that (completely legally) spits out 1 dollar per day. I’m using “box” in an abstract sense here: maybe it’s an investment or a business opportunity. How much would you pay for this box? In other words, what’s its fair market value?

What if it spit out one dollar per hour? Would you pay exactly 24x as much for it then? Or one per week–would you pay 1/7th as much?

What if it’s hard to measure how much money comes out of it–maybe sometimes it emits a dollar, but sometimes you have to put one in. Then what? -m

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2 Replies to “Economics 101 question”

  1. (Disclaimer: what I know about economics and finance comes almost exclusively from blogs and Wikipedia.)

    Based on my meager observations, I’m fairly confident that the valuation of oddly-shaped investments amounts to be whatever fiction the principals can agree upon. After all, how do you value something that can’t be compared effectively to anything else?

    That said, however, business journalists seem to speak of corporate acquisitions in terms of multipliers of free cash flow, which at a glance suggests how many years it would take to earn the purchase back in dividends at the current rate.

    It’s also worth noting that valuing an investment based on its past performance is a bet that it will continue to perform as well or better than it has, and can probably be considered a variant of the gambler’s fallacy, or perhaps the problem belonging to Nassim Taleb’s Thanksgiving turkey (no fragment anchor unfortunately; instead page search for “Bogus Math”).

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