Net and gross investment
The purpose of a commercial enterprise obtaining and increasing profit, which can be achieved by increasing prices or output.
To increase the volume of production is possible through intensification of the production process, but this will inevitably lead to rapid wear of the equipment used. To expand its production activities the company will have to raise funds to purchase new equipment.
In the economy distinguish between "gross" and "net" investments. Gross investment – is the financial resources that are used to increase the compensation of fixed capital of the enterprise. Used to charge for depreciation, and the increase of fixed capital is achieved through the use of net investment. From this it follows that the value of net investments can be determined by the formula:
NI = TI – A,
where NI – net investments, TI – gross investment, – the amount of depreciation for a certain period.
If NI < 0, this indicates a decrease of the production potential of the company.
If NI = 0, then economic growth is missing and the enterprise is simple reproduction.
If NI > 0, the production capacity increases and economic growth.
Factors that affect the amount of net investment
Investment activity can be seen at the macro level (at the level of the national economy) and micro level (at the level of the economy of a particular company).
By the amount of net investment can have a merge the following macroeconomic factors:
1. the stability of the economic and political system;
2. the level of technology;
3. the level of development of legislative base;
Macroeconomic factors affect all businesses operating in the territory of a particular state.
In addition, the value of the investment affected by the following additional factors:
- the expected profitability of investments:
- the rate of inflation in the economy.
An individual investor making a decision about investing in the company, assesses the likely rate of return or expected return on investment. In addition, a competent investor will analyze a number of alternative investment options. For example, you can spend money on the opening of a new production or expanding an existing one, and you can put those same funds in the escrow account. If interest rates will be higher than expected profitability of the investment, the investor would not be profitable to invest in the company.
The amount of investment is also significantly affected by inflation. Inflation "eats" the profits, therefore, nominal income will vary from actual. To carry out investment activities will be profitable only if the rate of return will exceed the rate of inflation.