Question

Investment consist of spending on new plants, capital equipment, machinery, inventories, construction etc. The investment decision weighs marginal benefits and marginal cost. The expected rate return is the marginal benefit, and the interest rate ( the cost of borrowing funds) represents the marginal cost.

True of false

Answer 1

> First statement is true

> Second Statement is true

> Third statement is true.

(* Investment refers to the addition to the existing stock of Capital. Therefore,Cost of capital equipment,plants , machinery, inventories , construction etc come under the category of investment.

* Decision on investment is taken by comparing marginal costs and marginal benefits of the investment ( marginal analysis) . Investment is usually undertaken if marginal benefits exceed marginal costs . If marginal costs exceed marginal benefits, then investment proposal is dropped.

* Marginal cost of investment refers to the additional cost of borrowing more money to fund investment.ln it's simplest calculation, marginal cost of funds is the rate of interest charged on loans. There is an inverse relationship between rate of interest and investment. High rate of interest leads to a fall in investment and lower interest rate leads to a raise in investment.)