3 factors that influence the rate of return essay
With MEC now at 8 per cent, the new MEI schedule, relating investment expenditures to the interest rate, must show zero net investment at an interest rate of 8 per cent point K.
Factors affecting risk return relationship
Countries with a prolonged period of low and stable inflation have often experienced higher rates of investment. This is also the rate that investors would expect from an absolutely risk-free investment over a period of time. This has led to greater investment — though it can also affect the quality of investment as there is less incentive to make sure the investment has a strong rate of return. The MEI is a percentage rate, and not the physical quantity. This is how federal policies have a great impact on the cost of capital. The rate of discount or yield i. In other words, is the risk you take on an investment worth the reward? With no shift in the MEC schedule and with no further fall in r, net investment spending, lower in each succeeding period, eventually raises the stock of capital to billion dollars, at which level the MEC equals r. Treasury bill rates. The rate of net investment spending in the second period is determined in the same way as the rate in the first period was.
New acquisition of capital will depend a lot on the capital structure policy and therefore the capital structure policy of the said company will have a bearing on its cost of capital. With the capital stock at billion dollars, the relevant MEI schedule is MEIn, which shows net investment to be zero and gross investment equal to replacement investment per time period.
Where Sp is the supply price or the cost of capital asset, R1,R2… Rn are the prospective yields or the series of expected annual returns from the capital asset in the years 1,2……. Population growth: A rapidly growing population means a rapid increase in the demand for all types of goods and hence investment rises and conversely, a decline in population will decrease the demand investment.
Political stability creates investor and business confidence because there is more visibility into possible investment returns. For businesses, this leads to increases in sales, profits and investments in new employees and equipment.
Level of current investment: If the existing level of investment is already high there will be little scope for further investment and vice versa. At the time of maturity of the investment, if the home currency weakens, the net realization in home currency would also be reduced.
Factors affecting return on investment
Interest rates can be outweighed by economic conditions. Subtract the risk-free rate of return from the market rate of return. For example, the long-term appreciation in the German D-Mark in the post-war period was related to the relatively lower inflation rate. In a period of low wage growth, firms may be more inclined to use more labour intensive production methods. Secondly, Keynes failed to recognize that interest rates are also governed by expectations like the marginal efficiency of capital. March Therefore, MEIb, the new schedule, lies below MEIa because of the increase in the stock of capital in the first time period; the whole MEI schedule must fall to a lower level with each movement to a lower point on the given MEC schedule, MEIb slopes down ward for the same reason that MEIa sloped downward—the rising supply price of capital goods as the rate of output of these goods is expanded in response to investment spending. In the first period, only when net investment reached the 30 billion dollars the rate was the rise in prices of capital goods sufficient to produce the greater drop in MEI from 9 to 6 percent, or to equality with r.
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