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Investment Projects
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An investment project is an allocation of resources with the expectation of a profitable return on the allocation in the future. The return is typically anticipated more than a year in the future. An allocation of resources that produces returns that benefit the current year are merely expenditures for operating expenses.
When a person has excess resources, such as money, he typically wants to do something with those resources so they can be as useful to him as possible. Ideally, most of a person's excess should be correctly used to generate the most benefits.
For example, if a person has a vacation home that he can rent during the weeks when he is not using it, that would often be a better allocation of excess resources than letting the house sit empty. Renting the house generates money, or a return on the investment made in the property, that goes beyond the owner's enjoyment when he is there.
Investors do not necessarily have to choose the use for excess resources that generates the highest return.
Investors do not necessarily have to choose the use for excess resources that generates the highest return.
A viable investment project will offer an attractive rate of interest that makes the loan of the money worthwhile to the investor and return interest and principal to the investor in a timely manner.
The suitability of a project will often depend on its ability to consistently generate positive cash flows to meet these obligations.
In some instances, the return on an allocation of resources to an investment project is in benefits, rather than money. For example, an ordinary investment project is an investment in real estate. The property is evaluated based on the rents it can generate, and the return on the investment is expected in the form of money.
An investment in a person's education or training, conversely, produces a benefit, rather than a direct return of cash. This type of investment project into human resources is designed to have different sorts of returns that address an investor's non-monetary goals and objectives.
SignificanceInvestment plays six macroeconomic roles:
1. it contributes to current demand of capital goods, thus it increases domestic expenditure;2. it enlarges the production base (installed capital), increasing production capacity;3. it modernizes production processes, improving cost effectiveness;4. it reduces the labor needs per unit of output, thus potentially producing higher productivity and lower employment;5. it allows for the production of new and improved products, increasing value added in production;6. it incorporates international world-class innovations and quality standards, bringing the gap with more advanced countries and helping exports and an active participation to international trade.
Investment DemandInvestment demand may be seen as determined by the interaction of the factors that affect the expected profitability of investment, on the one hand, and by those that affect the interest rate, on the other hand. The expected profitability of a contemplated unit of investment is best viewed as that rate of discount for which the sum of resultant additional expected receipts and expenditures, including the purchase cost, the yield, and the ultimate sale or salvage return, is zero.
Role of ExpectationsThe factors affecting the expected profitability of investment. The objective factors affecting expected profitability are technology, relative prices of factors of production, and future demand for product. If decision makers could know these with certainty, the investment function would be fully determined.
With the production function, relative prices, and demand for output constant, one may expect a constant demand for capital stock. Producers’ demand for capital goods, that is, investment demand, would consist only of demand to replace capital goods used up in production.
