Investment function shows the relationship between the desired investment expenditure (or the planned investment) and variables that determine the level of this investment There are a large number of factors that influence the decision to invest and thus determine the volume of investment. But in a preliminary analysis we can say that the decision to invest and the volume of investment spending is determined by the two main factors, viz., the ratio of interest (i) and the expected profitability of investment or the rate of return on capital(r). Thus, we can write investment function as
I = f( i, r)
Where I denotes the volume of investment, (i) is the market rate of interest at which money can be borrowed or given as loan and (r) is the rate of return on investment, i.e., expected annual profit from investment expressed as percentage of the cost of capital or amount of money spent on investment.
SUBMIT ASSIGNMENT NOW!