CHAPTER 26 Investment
Spinning wind into energy.
There’s a wind farm off the coast of Rhode Island and other wind farms are springing up in Texas, Oklahoma, Maine, and California. These sleek modern wind turbines look nothing at all like the windmills of old. The biggest is twice the height of the Statue of Liberty and its massive blades sweep out over an area as large as three football fields. When the wind blows, the blades spin, and a single turbine can generate enough electricity for thousands of households. They’re at the cutting edge of a renewable energy revolution that could power a new economy, freeing it of dependence on foreign oil. It could be the start of a greener economy that saves the environment by reducing the need to burn fossil fuels.
A wind farm is a massive investment. Each turbine costs millions of dollars. The owners aren’t spending these sums for the environment; they’re making hard-nosed investment decisions and will only invest in wind if it’s profitable.
The entrepreneurs running wind farms face the same decision that confronts all managers considering whether to invest in a new piece of equipment: Is the large up-front cost worth it in order to generate a stream of future revenues?
The tools that managers use to make multi-million-dollar investment decisions are the same tools that you’ll want to apply in your own life whenever you’re making decisions whose consequences play out over time.
Your task in this chapter is to explore the framework that executives use to evaluate investment decisions. We’ll develop some basic tools and then apply them to real-world investment decisions. We’ll use the insights we gain from studying individual investment decisions to explore what determines broader macroeconomic patterns in investment. But first, we’ll start by evaluating the important role that investment plays in driving macroeconomic conditions. Let’s make like a turbine and get going!