Factors to help Determine Sucsessful Investments
Factors to help Determine Sucsessful Investments
When using the term investment it refers directly to the acquisition of new capital such as buildings, machines or offices. Firms will usually make the decision to invest on the expectation to make a gain. Investments made by businesses or firms usually involve millions of dollars, making investment a very big important decision with many different factors to take into account. There are four main factors, which would most likely influence a decision regarding investment, they include the current rate of interest, future expectations, the level of income, the government and the accelerator theory.
Interest Rates
Interest rates are a variable rate which are manipulated through government policies whenever the economy is not stable. Interest rates have an influence on investment as you can see from the two following figures. Most decisions to invest involve borrowing money, so we can assume that there is an association between the cost of borrowing and the level of investment.
Investments usually involve large sums of money. In order to acquire this money firms must take out loans. Interest rates can be defined as the cost of borrowing or the reward for saving. If interest rates are high this will make borrowing more expensive making saving more encouraging. In contrast if interest rates are low this makes borrowing a more attractive offer. Firms are more likely to consider an investment at a low rate of interest. This shows us what kind of impact interest rates has on investment.
Future Expectations
Another factor that has a significant effect on investment, are a firms future expectations. If investment yielded an 11% increase and the current rate of interest was 10% investment would take place. However the future is unpredictable, because investment decisions take time to accomplish, there is usually a great deal of uncertainty. What businesses expect to happen in the future is very important. If a business’ management is feeling pessimistic about the future, low interest rates will not encourage investment. On the other hand high interest rates will not deter them from making an investment if they are feeling confident and optimistic about the future. This idea in a way contradicts our previous idea; this shows us that there are possibly a lot more...