Investments play an important role in the development of an individual enterprise and an entire state. It is investments that are the basis for expanding the company's activities, increasing production volumes and profits.
Net and gross investment
The purpose of a commercial enterprise is to obtain and increase profits, which can be achieved by increasing the price or volume of output.
It is possible to increase the volume of output by intensifying the production process, but this will inevitably lead to a rapid deterioration of the equipment used. To expand its production activities, the company will have to find funds to purchase new modern equipment.
In economics, the concepts of "gross" and "net" investment are distinguished. Gross investment is financial resources that are used to increase and replace the fixed capital of an enterprise. Depreciation charges are used for compensation, and an increase in fixed capital is achieved through the use of net investment. From this it follows that the value of net investment can be determined by the formula:
NI = TI - A, where NI is net investment, TI is gross investment, A is the amount of depreciation deductions for a certain period.
If NI is 0, then the production potential increases and economic growth is observed.
Factors that affect the value of net investment
Investment activity can be considered at the macro level (at the level of the state economy) and at the micro level (at the level of the economy of a particular enterprise).
The following macroeconomic factors can influence the amount of net investment:
1. stability of the economic and political system;
2. the level of development of technology;
3. the level of development of the legal framework;
4. taxation.
Macroeconomic factors affect all enterprises operating on the territory of a particular state.
In addition, the following additional factors affect the amount of investment:
- expected return on investment:
- the rate of inflation in the economy.
An individual investor, when deciding to invest in an enterprise, estimates the likely rate of return or the expected return on investment. In addition, a competent investor will certainly analyze several alternative investment options. For example, you can spend money on opening a new production or expanding an existing one, or you can put the same money on a deposit account. If the bank interest is higher than the expected return on investment, then the investor will not be profitable to invest in the enterprise.
The amount of investment is also significantly influenced by inflation. Inflation eats up profits, so the nominal income will differ from the real one. It will be profitable to carry out investment activities only if the rate of return exceeds the inflation rate.
