Determinants of investments, Microeconomics

Determinants of investments:

Expected Rate of Return:

Investment spending is guided by the profit motive; thebusiness sector buys capital goods only when it expects such purchases to be profitable.

Real interest rate:

Business firms typically borrow funds to make an investment and to repay their borrowings out of future revenues. Even if they do not borrow, managers know that if they use current revenues to finance investment purchases, they forgo the opportunity to earn interest.The annual opportunity cost of using a cedi to make an investment can therefore be represented by the real interest rate. The real interest rate is the price of using a cedi to make an investment purchase. Thus, the higher the real rate of interest, the less would be the profits to the business after paying interest and the less it will want to invest and vice versa.

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