This document discusses investment projects and investment. It defines an investment project as allocating resources with the expectation of a future profitable return over a year later. When people have excess resources like money, investing it can generate benefits rather than letting it sit idle. A viable investment project will offer attractive interest rates to investors and return principal and interest in a timely manner. The suitability of a project depends on its ability to consistently generate positive cash flows to meet obligations. Investment plays important macroeconomic roles like increasing production capacity and incorporating innovations. Investment demand is determined by expected profitability and interest rates. Expectations about technology, prices, and future demand affect profitability.

1. Investment Projects
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2. An investment project is an allocation
of resources with the expectation of a
profitable return on the allocation in
the future. The return is typically
anticipated more than a year in the
future. An allocation of resources that
produces returns that benefit the
current year are merely expenditures
for operating expenses.

3. When a person has excess resources,
such as money, he typically wants to
do something with those resources so
they can be as useful to him as
possible. Ideally, most of a person's
excess should be correctly used to
generate the most benefits.

4. For example, if a person has a vacation
home that he can rent during the weeks
when he is not using it, that would often
be a better allocation of excess
resources than letting the house sit
empty. Renting the house generates money,
or a return on the investment made in the
property, that goes beyond the owner's
enjoyment when he is there.

5. Investors do not necessarily have to
choose the use for excess resources
that generates the highest return.

6. Investors do not necessarily have
to choose the use for excess
resources that generates the
highest return.

7. A viable investment project will offer an
attractive rate of interest that makes the
loan of the money worthwhile to the investor
and return interest and principal to the
investor in a timely manner.

8. The suitability of a project will often
depend on its ability to consistently
generate positive cash flows to meet
these obligations.

9. In some instances, the return on an allocation of
resources to an investment project is in
benefits, rather than money. For example, an
ordinary investment project is an investment in
real estate. The property is evaluated based on
the rents it can generate, and the return on the
investment is expected in the form of money.

10. An investment in a person's education or
training, conversely, produces a benefit,
rather than a direct return of cash. This type
of investment project into human resources is
designed to have different sorts of returns
that address an investor's non-monetary goals
and objectives.

11. Significance
Investment plays six macroeconomic roles:
1. it contributes to current demand of capital goods, thus it
increases domestic expenditure;
2. it enlarges the production base (installed capital), increasing
production capacity;
3. it modernizes production processes, improving cost effectiveness;
4. it reduces the labor needs per unit of output, thus potentially
producing higher productivity and lower employment;
5. it allows for the production of new and improved products, increasing
value added in production;
6. it incorporates international world-class innovations and
quality standards, bringing the gap with more advanced countries and
helping exports and an active participation to international trade.

12. Investment Demand
Investment demand may be seen as determined by the interaction of
the factors that affect the expected profitability of investment, on the
one hand, and by those that affect the interest rate, on the other
hand. The expected profitability of a contemplated unit of investment
is best viewed as that rate of discount for which the sum of resultant
additional expected receipts and expenditures, including the purchase
cost, the yield, and the ultimate sale or salvage return, is zero.

13. Role of Expectations
The factors affecting the expected profitability of investment.
The objective factors affecting expected profitability are
technology, relative prices of factors of production, and future
demand for product. If decision makers could know these with
certainty, the investment function would be fully determined.

14. With the production function, relative prices, and demand for
output constant, one may expect a constant demand for
capital stock. Producers’ demand for capital goods, that is,
investment demand, would consist only of demand to replace
capital goods used up in production.

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