By: RAJAT TOKAS PAWAN LOHIYA PRIYANKA RAGHAV

INVESTMENNT
It is an activity of spending resources (money, lab our, time) on

creating assets that can generate income over a long period of time or which enhances the returns on the assets.

Investment can be classified following categories

Investment in Financial Assets Investment in Physical Assets Investment in Human capital

Miscellaneous Investment

Investment In Financial
It includes:Bank Deposits Deposits with companies Contribution to provident fund Shares & Debentures Govt. bonds treasury bills Personal lending etc

Investment in Physical Assets

It includes :Purchase of land Building Machinery Plants, etc..

Investment on Human capital

It includes expenditure on skill formation through education

and training that increases productivity and earning capacity of a person.

Miscellaneous Investment
It includes: Expenditure on replacement of depreciated and obsolete machinery Research & Development Installation of safety and meeting legal requirements.

Types Of Investment
Induced Investment Autonomous Investment

Induced Investment

Induced investment is income or profit motivated. Factor like wages, prices and interest changes which affect profits, affect induced investment. Thus induced investment is a function of income i.e. I= f(Y). It is increase or decrease with rise or fall in income.

Autonomous Investment

It is independent of the level of income and is thus income

inelastic. It is influenced by exogenous, factors like innovation growth of population, social and legal institutions, war, revolution etc. Investment in economic and social overheads made by government or private enterprise is autonomous. Such investment includes investment on buildings, dams, roads, schools, hospitals etc.

Factor Affecting Investment

I.

Marginal Efficiency Of Capital :- MEC is the highest rate of return expected from an additional unit of capital assets over its cost. If the rate of return from capital assets is less than rate of interest, new investment will not be made. If the expected rate of return exceeds the rate of interest, investment will be made continuously.

II. Existing Stock Of Capital Goods:- If the existing stock of

capital goods is large, it would discourage potential investors from entering in to the making of goods. And hence, investment will not made. The MEC and the capital stock are inversely related.

Factor Affecting Investment

III. Level Of Income:- If the level of income rises in the

economy through rise in money wage rates and other factors prices, the demand for goods will rise which will in turn, rise the inducement to invest.
IV. Liquid Assets:- If the investors possess large liquid assets,

the inducement to invest is high.

Factor Affecting Investment

V. Growth Of Population:- High population means growing

market for all types of goods in the economy. To meet the demand of an increasing population in all goods, investment will increase in all types of consumers goods industry.
VI. State Policy:- If the state levies heavy progressive taxes on

corporation, the inducement to invest is low and vice versa.

Factor Affecting Investment

VII. Consumer Demand:- The present and future demand for the

products greatly influences the level of investment in the economy. If the current demand for consumers goods is increasing rapidly more investment will be made and if the demand is low investment will be low.

Investment Appraisal

Looks at whether an investment project is worthwhile or not Can be used for all types of investment from the purchase of a

new piece of machinery to a whole factory It allows managers to make an informed choice regarding the viability of the project

Financial techniques of investment appraisal

These are all based on a number of assumptions:
All costs and revenues can be forecast accurately for future

years Key variables like interest rates will not alter That the business will be looking to maximise profits

Problems with Forecasts

There may be problems with forecasts because:
Competitors could bring out new products / change prices

altering sales and revenue Tastes and fashions may change causing an unexpected slump in demand The economy may change either upwardly or downwardly recession or boom Costs can be affected by inflation and import prices

Types of investment appraisal

Payback Period Accounting Rate of Return (ARR) Net Present Value (discounted cash flow) Discounted cash flow

Payback Method
This looks at how long it takes to pay back the initial cost of

the investment
Need to know how much revenue the asset will generate For example if a machine costs 50,000 and it produces items

50,000 items that retail for 50p each it will take 2 years to payback the initial investment

Payback Method
This allows you to compare projects which one takes the

shortest time to payback the initial investment It can take an investment less than a year to generate revenues that cover its cost

Average Rate of Return

Looks at the profit generated by the investment compared to

the cost of the investment Average profit ARR = ----------------------------------- x 100 Initial cost of investment
This gives the business a % figure showing the average rate of

return Businesses can then compare this figure to how much they would get with alternative investments / the bank

Discounted cash flow

This considers what money will be worth in the future Discounting reduce value of future earnings to reflect

opportunity cost of an investment

Reasons why this exists:
Risk Opportunity cost

Net Present Value

One way of discounting cash flow is looking at NPV This method takes into account inflationary pressures and interest rates The idea that the money increases in value Looks at how much you would need to invest now to earn a certain

amount in the future

Allows comparison of an investment by valuing all cash inflows from

the investment at the present value

You can compare what would happen if you invested the money in other

projects or just saved it in the bank

Net Present Value

Future Value PV = ----------------(1 + i)n Where i = interest rate n = number of years Cash flow x discount factor = present value Present Values can be found through valuation tables

MEASURES TO RISE PRIVATE INVESTMENT

LOWERING THE RATE OF INTEREST TAX REDUCTION

PUBLIC EXPENDITURE
PRICE POLICY PROMOTION OF RESEARCH ENCOURAGEMENT OF COMPETITION ECONOMIC PLANNING

Thank you