Money spent of expenditures on:
- New plant (factories)
- Capital equipment (machinery)
- Technology (hardware software)
- New homes
- Inventories (goods sold by produces
How does business make investment decision?
-Cost/benefit analysis
How does business determine the benefits?
-Expected rate of Return
How does business count the cost?
- Interest Cost
How does business determine the amount of investment may undertake?
-Compare expected rate of return to interest cost
*If expected return> interest cost , invest
*If expected return< interest cost then do not invest
Real (r%) v. Nominal (I%) Interest Rate
Nominal is the observable rate of interest. real subtract out inflation (pie%) and is only known ex post factor
Real interest rate (r%)
- r%= I%- pie%
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