$ 10 pa every year $ 16 pa in years 1 – 5 cumulative cf $ 140 $ 100 $ 80 npv ( rational ) $ 73 $ 66 $ 63 $ 49 $ 52 $ 55 ranking ( rational ) npv ( myopia ) ranking ( myopia ) in the absence of short - termism, project a is selected. its payouts are back - loaded but significant ; it generates a net excess return of 22 %. 17 short - termism hits such long duration projects hardest. the impatient investor chooses project c. this project delivers lower cashflows but these are front - loaded. in npv terms, the project selected is the worst on offer, whereas the rationally optimal project ranks last. capital allocation is not just sub - optimally low ; it is also skewed towards sub - optimally short - duration projects. ( b ) asset pricing consider now a formal model of multi - period equity price determination. finance theory typically assumes that investors care about both the level and uncertainty of their wealth and are risk averse. in this world, agents require a premium to invest in a company. more formally, the expected return can be written as the sum of the risk free rate and a companyspecific risk premium for company j : 18 the actual return on an investment is the sum of the capital gain and the dividend yield : assuming an efficient market, actual returns differ only from expected returns due to a forecast error which is uncorrelated with expected returns. 19 using this assumption, we can substitute ( 4 ) into ( 3 ) to give an equation for the equity price. the return is $ 73 – $ 60 = $ 13, divided by the cost of investment. this is the case with the capital asset pricing model ( capm ) ( lintner ( 1965 ), sharpe ( 1964 ) ) and arbitrage pricing theory ( ross ( 1976 ) ). under the capm, for example, the company specific risk premium is equal to the company specific beta multiplied by the market risk premium. this means. that is, we assume that bis central bankers ’ speeches. so the price of the security is simply the expected price and dividend in the next period, discounted by the sum of the risk - free rate and the company - specific risk premium. by repeated substitution, this asset pricing equation can be written as a generalised form of ( 1 ) : the current share price is a function of future discounted dividend streams and

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