Investment decision making process. Which of the following does not affect the demand for labor? When making investment decisions, firms take into account
Investments - financial investments in promising projects.
Investors are usually representatives of large businesses with free financial resources that can be used to implement new financial projects. The procedure for approving a certain idea regarding the investment of money ends with the adoption of an investment decision, on the correctness of which the success of the whole business depends.
concept
An investment decision is a final decision that is made on the basis of a thorough analysis of the prospects for investing funds in the development of a particular object or the implementation of an idea. In a simplified sense, this is the choice of one or more investment options from a certain number of possible ones, taking into account the strategic goals of a particular investor and his financial capabilities. At the same time, the main criteria for making an investment decision are personal experience, a good understanding of the topic of investment, a competent risk assessment and calculation of potential profitability.Aspects taken into account when making an investment decision:
- The prospects of the invested object, as well as the amount of profit that the project can bring; here it is important to calculate the market trends and make an analysis of its development for several years ahead.
- Opportunities for an investor to develop an enterprise: opening new directions, recruiting and training personnel, improving material and technical equipment.
- The presence of potential competitors in the market and the ability to withstand competition in the future.
- Ability to optimize the production process, introduce new technologies and scientific inventions.
Investment decisions must meet the following requirements:
- efficiency, which is directly determined by the amount of profit (income), which must exceed the amount of invested funds;
- justification taking into account discounting;
- profitability, which, according to calculations, should exceed the inflation rate;
- optimal risks, calculated taking into account all objective and subjective factors that may affect the implementation of an investment decision.
Types of investment decisions
Investors in the feathered periods of time perform certain tasks (PR, expansion of production, profit, capture of new markets), based on which a specific investment decision is made. To date, there is the following classification of investment decisions based on the direction:- For the expansion and development of the enterprise.
- In order to reduce costs.
- For the acquisition of new assets (tangible/intangible).
- Improvement of working conditions.
- To explore a new market.
(TNK). Figuratively speaking, there is a process of formation of ecological consciousness. The same is true in financial circles, where a growing number of large banks and financial companies are taking environmental concerns into account when making investment decisions. This circumstance is especially important for enterprises of countries with economies in transition, which are trying to get support from Western partners and investors and provide more attractive conditions for cooperation with them.
| Rice. 4.6. Investment Decision Making Process |
The amount of investment depends on an estimate of the future marginal productivity of capital, and so far we have treated this factor as something given that follows from the production function. In practice, investment decisions are associated with uncertainty. There are millions of different commodities, and the marginal product of capital in the production of any of them depends on the future demand for the good (the demand also determines the price of the good in the future). The marginal product of capital also depends on countless uncertain circumstances, technological and other factors that affect the production process. This uncertainty is exacerbated by the fact that before making an investment decision, it is necessary to assess the business environment for many years ahead, and not just for the immediate period.
For investors, making investment decisions is of particular importance. Given this, the crucial moment is the effective selection of investment proposals. Ensuring that the enterprise is applying appropriate valuation methods is an important part of this process. Research shows that around the world, in practice, companies use four methods for assessing investment opportunities. This
In the examples discussed, the controller proposes a business case methodology that provides a framework or path in the decision-making process. When it came to justifying investments, it was the discounted cash flow method (DCF), in other tasks - the method of coverage amounts. It should be noted that the DCF method also contains elements that correspond to the structure of coverage calculations. So, the payback period is a kind of critical point, i.e. the time that must elapse before the invested amount is returned from cash flows.
At the first (preparatory) stage - the stage of making a decision on investment - within its first phase, investment goals are formed, in the second phase the direction of investment is determined, and in the third phase, specific objects for investment are selected, an investment agreement is prepared and concluded, which defines the rights and the obligations of the parties to the agreement regarding the amount of invested funds, the timing and procedure for investments, the interaction of the parties in the implementation of the investment process, the procedure for using the investment object, the ownership relationship to the created investment object, the distribution of future income from the operation of the object, etc. By signing an investment agreement, the invested tangible and intangible benefits are given the status of investments.
The categories of risk and return form the core of modern risk management concepts. The inevitability of risk in the pursuit of ultra-high incomes is taken into account when planning the creation and development of an enterprise in business plans. For example, when conducting marketing research, they take into account the possibility of being at a loss when demand falls and prices for products and resources change - entrepreneurial risk. In planning and organizing production processes, they take into account the risk of reducing profitability by setting a certain level of efficiency in the use of resources and, accordingly, the level of current costs and arrived. When making investment and financing decisions, they take into account the risk of loss of financial stability and liquidity. In the process of monitoring the business plan, the perceived and accepted level of risk is controlled when organizing and coordinating the activities of departments and performers. Managers should be remunerated accordingly based on their ability to anticipate developments and make effective decisions in the face of increased risk.
Risky business is the most effective form of organization of investment processes. But from the point of view of an industrial enterprise, it has a major drawback, which consists in too high a degree of entrepreneurial risk. In addition, a review of the investment practice of enterprises showed that there are no standard investment decisions and each investment process, as a rule, requires a special approach. Therefore, it is legitimate to talk not so much about specific forms and methods of organizing investments, but about the general principles for making strategic decisions on investments in the industrial sector.
Setting investment priorities and directing corporate resources to the most attractive types of business. Different types of business that are part of a diversified company usually do not have the same attractiveness in terms of investing additional funds. This part of the strategy formation process includes deciding on priorities, i.e. about investing more capital in certain types of business and about directing resources to those areas where the potential for profit is higher, and about withdrawing resources from those areas where it is lower. A corporate strategy may include phasing out business units that are chronically underperforming or operating in increasingly unattractive industries. This divestment frees up unproductively used investments to invest in more promising businesses or to finance attractive new acquisitions.
Finally, we have seen that investment appraisal methods and criteria are only one aspect of the investment process, and that other aspects such as finding suitable projects and monitoring and controlling projects are vital to making effective investment decisions.
Applied to
If the nominal interest rate is 10% and the inflation rate is set at 4% per year, then the real interest rate is:
A. 14%; B. 6%; B. 2.5%; G. -6%; D. 4%.
The equilibrium interest rate equalizes:
A. Nominal and real interest rates.
B. The volume of demand and supply of borrowed funds.
B. Consumption and savings. D. All quantities indicated.
D. None of the situations takes place.
When making investment decisions, firms take into account:
A. The nominal interest rate. B. Real interest rate.
B. The nominal interest rate minus the real interest rate.
D. Other quantities not listed here.
D. The real interest rate minus the nominal interest rate.
4. A positive decision to build a bridge that will last 200 years and bring an annual profit of 10% will be made on the condition that the interest rate is:
A. Not more than 2%; B. Not more than 20%;
B. 10% or less; D. 10% or more.
E. There is no information to make a decision.
5. Bringing income paid after a certain period to today's period, at the current interest rate, is:
A. Discounting. B. Inflation.
B. Deflation. D. Indexing.
Task
The total income of the enterprise is 600 thousand den.un. The enterprise pays wages to employees - 300 thousand den.un. In addition, the cost of raw materials and materials is 100 thousand den.un. The implicit costs of the enterprise are 150 thousand den.un. Task: determine the accounting and economic profit of the enterprise.
3. Determine whether the following statements are true (B) or false (H):
1. Differential rent is the difference between the payment for a unit of attracted resources and the minimum at which this unit can be offered on the resource market.
2. Capitalized - this is the total value of all future lease payments that the land is expected to be able to bring.
3. Investment in human capital is any action that improves skills and abilities, or in other words, labor productivity.
Task
The table provides basic information about the firm's production when hiring a variable amount of labor and a fixed amount of capital. Fill in table 1. Using the data obtained, fill in the firm's demand for labor in table 2.
Table 1.
| The amount of labor | Cumulative output | marginal product of labor | Total income | Marginal product of labor in monetary terms |
Table 2.
OPTION 11.
Abstract topic:
"Organizational forms of entrepreneurship in a market economy"
Sample plan:
1. Organizational and legal forms of entrepreneurship.
2. Specificity of organizational forms of entrepreneurship in the Russian economy.
3. Topical issues of joint venture development in Russia.
Test:
1. Choose the correct answer:
1. Nominal GDP is measured in:
A. Current market prices. B. Basic (constant) prices.
B. World prices. D. All answers are wrong.
2. The GDP deflator is calculated as the ratio:
A. Real GDP to nominal.
B. Nominal GDP to nominal.
B. Nominal GDP to real.
D. All answers are wrong.
3. NDP is GDP reduced by:
A. Indirect taxes. B. Depreciation.
B. Gross domestic private investment.
D. All answers are correct.
4. If the volume of nominal GDP and the price level increased by the same amount, then real GDP:
A. Grew up. B. Decreased. B. Has not changed. D. All answers are wrong.
5. Goods purchased for further processing are:
A. Final goods. B. Durable Goods.
B. Intermediate goods. D. Means of production.
6. Gross domestic private investment is taken into account when calculating:
A. GDP by income. B. GDP by Expenditure.
B. PVP. D. All answers are wrong.
7. The ratio of the price of a "market basket" in the current year to the price of the same "market basket" in the base year is:
A. GDP deflator. B. Price index.
B. Interest rate. D. Double count.
8. The calculation of real GDP does not include the influence of ...
A. Changes in intermediate products.
B. Changes in the price level. B. Inflation.
D. Changes in nominal GDP.
9. Republic "W" nominal GDP in the base year was CU3,000 million. and increased by 300 million units the following year. If the GDP deflator is 1.2, then...
A. Nominal GDP increased by 10%, real GDP decreased by 8.3%.
B. Nominal GDP increased by 10%, real GDP increased by 2%.
B. Nominal GDP increased by 20%, real GDP increased by 12%.
D. Nominal GDP fell by 10%, real GDP remained unchanged.
10. Fill in the blank. If net exports are reduced by 10 billion den. units, and personal consumer spending will increase by 20 billion den. units ceteris paribus, then the volume of GDP is ____________ billion den. units
A. Increase by 30. B. Decrease by 10.
C. Increase by 10. D. Decrease by 30.
1) A part of economic theory that studies the patterns of functioning and development trends of the country's economy as a whole in terms of ensuring conditions for sustainable economic growth, full employment of resources, minimizing inflation and achieving general macroeconomic equilibrium. The total market value of all final goods and services produced in a country during a year.
2) The total quantity of goods and services that producers can offer at a given price level.
3) A set of economic units that are owners of economic resources, independently make decisions, form demand in the market for consumer goods and services, act on the supply side in the market for factors of production, strive to maximize the satisfaction of their needs.
4) Horizontal is the segment of the aggregate supply curve at which the price level remains constant when real GDP changes.
5) Many business units that use factors of production to create material goods for the purpose of their sale, independently make decisions, act on the market of factors of production on the demand side, form a market supply in the market of goods and services, strive to maximize profits.
6) Constantly repeating and renewing in society the process of production, distribution, exchange and consumption of material goods and services.
7) The division and ratio of the main parts of products produced in the economy, depending on its functional purpose.
8) The total volume of goods and services demanded in the economy at any given value of the price level.
9) The distribution of economic resources existing in society between branches and spheres of material production.
10) A set of internationally recognized rules for accounting for economic activity, reflecting all major macroeconomic relationships.
Task
The table presents data on labor resources and employment in the first and fifth years of the period under review, in thousand people.
Define:
The number of unemployed and the unemployment rate in the first and fifth years of the period under review.
Can it be argued that there was full employment in the fifth year of the period under review?
OPTION 12.
Abstract topic:
"Small enterprises and problems of small business development in the Russian economy"
Sample plan:
1. The objective necessity of the existence of small businesses in a market economy.
2. The role of small business in a market economy: the experience of developed countries.
3. Problems and prospects for the development of small business in the Russian economy.
Test:
1) The unemployment rate is determined by comparing the total number of employed and unemployed.
2) The model of the circulation of resources, products and incomes is simplified and therefore does not allow to reflect even the main economic processes and relationships that take place in the real economy.
3) The natural rate of unemployment is the rate of unemployment in the absence of a cyclical form of unemployment.
4) The reproduction structure reflects the division and ratio of the main parts of the products produced in the economy, depending on its functional purpose.
5) Structural unemployment is unemployment associated with a voluntary change of place of work by employees or with periods of their temporary dismissal.
6) The second subdivision of social production produces the means of production.
7) Frictional unemployment is unemployment caused by a mismatch between the vocational training of the workforce and the structure of production.
8) In the modern economy, the sphere of material production includes the production of material and non-material goods.
9) Inflation is a general increase in production.
10) With an annual 10th increase in prices, doubling their level occurs every 10 years.
11) In the post-industrial economic system, the service sector includes the production of tangible and intangible services.
12) With an annual 5% reduction in prices, the real income of families with a fixed income increases by 5% per year.
13) The sectoral structure of the national economy reflects the share of individual commodity producers in the production of products created in society.
14) Unforeseen inflation can lead to a redistribution of income between the debtor and the creditor in favor of the first.
15) Recovery is a phase of the economic cycle characterized by full employment and full use of resources.
2. For each of the following provisions, find the corresponding term or concept:
1) The ascending segment of the aggregate supply curve, located between its Keynesian and classical segments.
2) The vertical segment of the aggregate supply curve corresponding to the position of the economy at full employment.
3) The excess of the current unemployment rate by 1% over the unemployment rate at full employment is equal to the lag of the real NNP from the potential NNP by 2.5%.
4) The unemployment rate in the absence of a cyclical form of unemployment.
5) All persons who can and want to work.
Task
GDP is CU1500. Consumer spending = CU700, government spending = CU400, gross domestic private investment = CU380.
Define:
The volume of net exports;
PVP, provided that the depreciation amount is CU70,
The volume of exports, assuming that imports are 80 units,
In this example, net exports are expressed as a positive value. Can it be negative? In which case?
OPTION 13.
Abstract topic:
"Price in the Market Economy System"
Sample plan:
1. Economic nature and price functions.
2. Price marketing strategies.
3. The practice of pricing in developed countries and its significance for the Russian economy.
Test:
1) The SNA entered the Russian practice of accounting for the main macroeconomic facts and trends in 2000.
2) The system of national accounts is a set of internationally recognized rules for accounting for economic activity, reflecting all major macroeconomic relationships.
3) The term "national accounting" was proposed by J. Keynes.
4) In the SNA, financial corporations and households - refer to the real sector of the economy.
5) In the SNA, institutional units that, in addition to performing their political and economic regulatory functions, are engaged in the production of non-market goods and services for individual or collective consumption and the redistribution of income, constitute the government sector of the economy.
6) The value of net exports is equal to the sum of exports of goods and services and the volume of imports of a given country.
7) GDP is the total market value of all final goods and services produced in a country during a year.
8) The final product is goods and services purchased for final use, and not for further processing, processing or resale.
9) Net exports are gross investment minus depreciation charges.
10) The method of calculating GDP by income stream involves the summation of all income received from the production of the entire volume of output of a given year.
11) Real GDP is the value of goods and services produced in a year and measured at current prices.
12) If actual GDP is equal to potential, this means that the economy is developing at full employment.
13) The economic cycle is the ups and downs of business activity that repeat over a number of years.
14) The volume of investment in machinery and equipment usually does not increase before the onset of an economic crisis.
15) Recession is such a phase of the economic cycle in which the economic system approaches the lowest level compared to the level of GDP at full employment.
16) If the unemployment rate is equal to the natural one, then the volumes of potential and actual GDP are equal.
17) The aggregate demand curve has a negative slope.
18) The flexibility of prices and their downward trend is due to the ratchet effect.
19) The wealth effect is a non-price factor that determines the dynamics of aggregate demand.
20) The decline in aggregate demand is the result of the interest rate effect, import purchases and real cash balances.
Task
Determine the status of the persons listed below in terms of their relationship to employment and the labor force if they are classified as follows: employed (E), unemployed (B), not included in the labor force (N).
An employee who has been voluntarily fired.
An employee transferred to a part-time work mode.
A teacher who, for health reasons, can no longer work.
A laid-off worker who for a long time could not find a job and therefore stopped looking for one.
A student who is a full-time student at an educational institution.
An auto mechanic who studies at the evening department of an educational institution.
A housewife who only cares about her home and family.
A housewife who works part of the time as a librarian.
Task
Suppose that in the first year, the total production in the hypothetical economy consisted of 4 pieces of good X at a price of CU 3; 1st piece of product Y at a price of 12 units; 3 pieces of product Z at a price of 5 units. Suppose that by the third year the prices of these goods have reached the following level: good X - CU 5, good Y - CU 10, good Z - CU 10. Determine the GDP price index for the first year using as a base third year.
OPTION 14.
Abstract topic:
"Peculiarities of pricing for factors of production"
Sample plan:
1. Demand and supply in the market of factors of production.
2. Peculiarities of pricing in factor markets:
A) the labor market
B) capital market;
C) the land market.
3. State policy in the field of pricing for factors of production.
Test:
1. Determine whether the following statement is true (B) or false (N):
1) Macroeconomics is a part of economic theory that studies the patterns of functioning and development trends of the country's economy as a whole.
2) The market for goods and services is the market in which households sell their own factors of production to entrepreneurs.
3) The model of the circulation of resources, products and income assumes that households spend all their money income.
4) The model of circulation of resources, products and income explains how prices for goods and services are formed.
5) The second subdivision of social production produces the means of production.
2. For each of the following provisions, find the corresponding term or concept:
1) The cost of newly produced means of production (machinery, machine tools, equipment, buildings) intended for the production process and replenishment of inventories.
2) Personal income minus individual taxes.
3) Exports of goods and services minus imports of goods and services.
4) Goods and services purchased for final use (and not for further processing or resale).
5) State payments to individual individuals (or families) received free of charge.
6) Summation of all expenses in the economy for the purchase of final products.
7) Gross investment minus depreciation.
8) All government spending on final goods and services (these do not include transfer payments).
9) Household expenditures for the purchase of consumer goods and services.
10) The continuous increase in the average price level in the economy, the depreciation of money, which occurs due to the fact that there are more of them in the economy than necessary, i.e. the money supply in circulation "swells".
11) A situation in which inflation is alternately supported by both inflationary demand factors and inflationary supply factors, and the action of each of these factors will be caused by the action of the opposite factor.
12) Change in nominal income minus inflation rates.
13) Nominal interest rate minus the rate of inflation.
14) Anti-inflationary policy of the state, which implies adaptation to inflation, mitigation of its consequences.
15) Anti-inflationary policy of the state, aimed at eliminating the causes of inflation.
Task
There is the following information: the number of employed 90 million people. The number of unemployed is 10 million people.
Define:
Unemployment rate.
A month later, out of 90 million people who had a job, 0.5 million people were fired; 1 million people of the officially registered unemployed stopped looking for work. What are now the number of employed, the number of unemployed and the unemployment rate.
OPTION 15.
Abstract topic:
"Financial system and its stability in a market economy"
Sample plan:
1. Financial system, its structure and functions.
2. State budget and its role in the economy.
3. Financial crises: essence, causes and consequences.
Test:
19. Which of the indicated categories of workers are worn to industrial and production personnel (to auxiliary workers)
20. The division of expenses into fixed and variable is carried out in order to
21. Product profitability is determined
22. The profitability of production assets is determined
23. For a piece-rate form of remuneration, labor cabbage soup is characteristic in accordance with
24. The cost of engineering products includes
25. For simple reproduction, it is necessary
26. For expanded reproduction, it is necessary
27. Costs in the economic sense of the word (economic costs)
28. The fixed costs of a firm are
29. Price discrimination is
30. When making investment decisions, firms take into account
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Sample test questions for the exam (test)
- Pricing strategies include:
- Market breakthrough strategy;
- Preferential price strategy;
- Strategy "Removal of foam";
- Flexible pricing strategy;
- Options 1, 2,3 are correct;
- Options 1,2,4 are correct.
- The production process is divided into:
- Basic; auxiliary, serving;
- Main, auxiliary, control;
- Test; control; basic;
- There is no correct answer.
- Main production shops are divided into:
- For procurement, control, painting;
- For procurement, processing, assembly;
- For processing, assembly, adjustment.
- All answers are correct.
- Operations differ depending on the means of labor used:
- Manual, machine;
- Machine-hardware, automated;
- Manual, machine, semi-automatic, automated;
- Manual, machine, automated, machine-manual.
- The main principles of the organization of the production process include:
2) Discontinuities, combinations, universalizations;
3) Automaticity, specialization, mobility;
4) Differentiation, specialization, rhythm.
- Quality indicators are divided into:
- Individual and group;
- Single and integral;
- single and complex.
- Group and ecological.
- The concept of a single quality indicator "Reliability" includes:
- Purpose indicators;
- maintainability;
- Transportability;
- Environmental friendliness;
- Aesthetics.
- When assessing the quality level, the following types of indicators are used:
- basic, estimated, specific;
- Basic, specific, relative;
- Final, basic, relative;
- Basic, estimated, relative.
- When choosing basic indicators of product quality, the quality level is determined by one of the following methods:
- The final assessment method;
- The sum of years method;
- The method of complex-differentiated assessment;
- proportional method.
- The quality level characteristic is used to determine:
- product competitiveness;
- modernity of products;
- legality of production;
- consumption volumes;
- product brands.
- Multi-operation cycles are divided into:
- consistent;
- parallel;
- multi-stage;
- long processing cycles;
- series-parallel;
- true 1,2,5;
- correct 1,2,3.
- To establish labor standards, use:
- Chain substitution method;
- Method for calculating the marginal productivity of labor;
- Calculation and analytical method;
- differential method.
- The analytical and research method for establishing labor standards includes:
- photography during lunch breaks;
- photo of the working day;
- shooting of the working day;
- method of multi-moment observations.
1) the size of the volume of marketable products per 1 rub. fixed production assets;
2) the level of technical equipment of labor;
3) specific costs of fixed assets per 1 rub. sold products;
4) the number of turnovers of working capital.
15. The circulation funds include:
- material resources of the enterprise, industry;
- finished products in the warehouse of the enterprise, products shipped (but not paid), cash;
- finished products shipped to consumers, cash in shares, on a current account, in cash, deferred expenses;
- enterprise vehicles, industrial buildings, structures;
- profit.
- the amount of products sold per 1 rub. production funds;
- the average duration of one turnover of working capital;
- the number of turnovers of working capital for the corresponding reporting period;
- the level of technical equipment of labor;
- costs of production assets per 1 rub. commodity products.
- Advances from buyers and customers;
- wage arrears to employees and accruals for this amount;
- depreciation deductions;
- profit;
- accounts payable.
18. The period of turnover of working capital characterizes:
- the time spent by circulating production assets in stocks and work in progress;
- the time of passage of working capital through the stages of acquisition, production and sale of products;
- average speed of movement of working capital;
- the number of days for which a full turnover is made;
- the time required to fully update the production assets of the enterprise.
19. Which of the indicated categories of workers are worn to industrial and production personnel (to auxiliary workers):
- working workshops, canteens and auxiliary facilities,
- workers of the tool shop, warehouse and transport shop;
- workshop workers, engineers, security workers and students;
- kindergarten and recreation center workers.
- profit forecasting;
- determining for each specific situation the volume of sales that ensures break-even activity (critical volume);
- separation of workshop, production and commercial costs.
21. Product profitability is determined by:
- the ratio of balance sheet profit to the volume of products sold;
- the ratio of profit from sales to sales proceeds (excluding VAT and excise tax);
- the ratio of balance sheet profit to the average value of the property of the enterprise;
- the ratio of balance sheet profit to the average cost of fixed assets and inventories.
1) the ratio of balance sheet profit to the volume of products sold;
2) the ratio of profit from sales to sales proceeds;
3) the ratio of balance sheet profit to the average value of the property of the enterprise;
4) the ratio of profit to the average cost of fixed assets and inventories.
23. For a piece-rate form of remuneration, labor cabbage soup is characteristic in accordance with:
- quantity of manufactured (processed) products;
- the amount of time worked;
- the number of shifts worked;
- official salary.
- current production costs;
- capital expenditures;
- expressed in monetary terms, the costs of the enterprise for the production and sale of products;
- the cost of raw materials, materials and wages of workers and sick pay;
- equipment costs.
- the equality of the produced means of production to the value of the means of production expended in the production process;
- orientation of the population to meet the simplest needs;
- natural economy;
- simple trade.
- capitalist commodity production
- orientation of the population to meet the simplest needs
- social distribution of labor
- conversion of part of the surplus product into means of production
- includes explicit and implicit costs
- includes implicit costs, including normal profit
- include explicit but not implicit
- include implicit but not explicit
28. The fixed costs of the firm are:
- costs of resources at prices prevailing at the time of their consumption
- minimum production costs of any volume of products under the most favorable production conditions
- Costs incurred by the firm even if the product is not produced
- Implicit costs
- No answer is right
29. Price discrimination is:
- Selling the same product at different prices to different buyers
- pay differences by nationality and gender
- exploitation of workers by setting high prices for consumer goods
- higher prices for higher quality goods
- All answers are wrong
- nominal interest rate
- real interest rate
- nominal interest rate minus the real interest rate
- only others not listed above
- real interest rate minus the nominal rate.
Rate and rate (level) of interest. The role of the interest rate in investment decisions
Interest rate(interest rate, g)- the price of money that must be paid for obtaining a cash loan.
It is paid to banks. Its source is a part of the profit that entrepreneurs (manufacturers or merchants) are forced to give to creditors for the temporary use of their money. Interest is the result of buying and selling money.
Economic analysis distinguishes between nominal and real interest rates.
Nominal interest rate(nominal interest rate) - interest rate in monetary terms without adjustment for inflation, i.e. interest rate expressed in national currency at the current rate.
Real interest rate(real interest rate) - interest rate in monetary terms, adjusted for inflation. It is defined as the nominal interest rate minus the inflation rate.
The profit of an entrepreneur using borrowed funds is divided into entrepreneurial income and interest.
Norm (level) of interest is the ratio of the amount of annual income received on loan capital to the amount of the loan granted.
For example, if a capital of $100,000 is loaned, the annual income from this capital is $7,000, and the rate of interest is 7%.
The rate of interest is in a certain dependence on the rate of profit, which is its maximum limit. Other things being equal, the rate of interest is higher, the higher the rate of profit. However, this does not mean that the interest rate depends only on this indicator. In each given period, it is determined by the ratio of supply and demand of money capital, if its supply increases while demand remains unchanged, then the rate of interest falls, if the supply decreases, then the rate of interest rises. Thus, in an unstable market economy, the interest rate is subject to frequent and often sharp fluctuations.
The interest rate reaches its maximum at the height of the crisis. This is due to the fact that during this period goods are not sold, and firms need money to pay for previously issued debt obligations, so there is a massive pursuit of means of payment, which causes a sharp increase in the interest rate with a fall in the rate of profit. In the period of economic recovery, the interest rate falls, and the rate of profit, on the contrary, rises sharply. Thus, during the economic cycle, the rate of interest moves in the opposite direction to the movement of the rate of return of real capital.
The real (not nominal) interest rate plays an important role in investment decisions. Low interest rate(soft monetary policy) leads to increased investment and expansion of production. High interest rate(tight monetary policy) stifles investment and constrains production.
In other words, the rate of interest distributes the income of the firm, and ultimately the social real capital, between those industries in which they will be most productive and, accordingly, most profitable. This distribution of capital is carried out in the interests of both individual firms and society as a whole.
Discounting principle
To compare present expenses and future income, it is necessary to give today's estimate of future income. To solve this problem, the principle of discounting is applied.
Discounting- this is a reduction of all cash flows in the future (payment flows) to a single point in time in the present, taking into account changes in the value of money over time.
In this case, reduction to a point in time in the past (to the current period) is called discounting and by the time in the future - buildup (compounding).
Accrual to a certain point in the future is performed by multiplying past cash flows (payment flows) by the accrual factor (Ka):
Discounting is done by multiplying future cash flows (payment flows) by the discount factor (Co):
where / - interest rate;
P - number of periods.
In this way, discounting- this is a reduction to each other of the streams of income (benefits) and costs based on the discount rate in order to obtain the current (today's) value of future income.
Determining the present value is essential to an entrepreneur's investment decisions. It is only necessary to invest when the expected returns are higher than the costs associated with the investment.
World experience shows that the recovery of the economy from the crisis is possible primarily on the basis of investment. Investment activity should grow, first of all, at operating enterprises, where there are more opportunities both for increasing capital investments and for accelerating their return and increasing efficiency.