What are the fundamental factors that affect whether a business should invest?  

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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For a business, investment is defined as buying capital goods -- goods that will be used to produce other goods.  So this would be like a business buying a new machine.

The most basic fundamental factor to consider is whether the machine will earn you more revenue than it costs you to buy it.

In order to figure this out, a business must try to predice such things as tax rates, interest ratesm, and the prices that they will have to pay for inputs and that they can charge for outputs.

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

There are two fundamental requirements to justify investment by a business. The first is the availability of funds for investment. These, sources include the internal accruals from the profits made by the business and from external resources. This again include two options - increasing the owners equity, or borrowing from external sources.

The second fundamental requirement to justify business investment by business is the existence of suitable opportunity to earn adequate profit from the new investment. The opportunity must suit the business in terms of its capability to operate and manage the business activities associated with the additional investment.

dbwl's profile pic

dbwl | College Teacher | (Level 1) eNoter

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Investment is your income minus (your savings + consumption). So, the more you Invest in something, the less you can save your income for your future uses, and the less you can use your income right now.

So, if your business is going to productivity if you invest right now, then you should do so, after considering the opportunity costs of your consumption and future investments.

In order to decide whether your current investment will increase the productivity of your firm or or not, you have to look at your marginal revenue-which is the additional revenue that you get when you produce an additional product. If your marginal revenue is on the rise, then you should definitely invest right now, because it means your business currently has potential, meaning it can expand further. However, if your marginal revenue is negative, you should put your investments in other uses, like consumption and saving.

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