Depreciation is a decline in an asset’s economic value over time.
gross investment minus depreciation 7.5 41.7 688.7 Net investment = 10.3 58.3 961.4 depreciation 17.8 100.0 1,650.1 Total gross private investment 4.3 24.5 403.8 Residential structures 0.5 2.6 43.3 Change in inventories 9.9 55.6 917.4 Equipment and software 3.1 17.3 285.6 Nonresidential structures AS A PERCENTAGE OF GDP AS A PERCENTAGE OF TOTAL GROSS INVESTMENT BILLIONS OF CURRENT DOLLARS Private Investment in the U.S. Economy, 1999
The expected rate of return on an investment project depends on:
the price of the investment,
the expected length of time the project provides additional cost savings or revenue, and
the expected amount of revenue attributable each year to the project.
A Menu of Investment Choices and Expected Rates of Return 5 100,000 G. Employee cafeteria 7 1,000,000 F. Advertising campaign 10 400,000 E. Ten new delivery trucks 12 100,000 D. New automated billing system 15 1,500,000 C. Sales office in another state 20 2,600,000 B. New branch plant 25 400,000 A. New computer network (2) EXPECTED RATE OF RETURN (PERCENT) (1) TOTAL INVESTMENT (DOLLARS) PROJECT Potential Investment Projects and Expected Rates of Return for a Hypothetical Firm, Based on Forecasts of Future Profits Attributable to the Investment
A Menu of Investment Choices and Expected Rates of Return
When the interest rate is low, firms are more likely to invest in new plant and equipment than when the interest rate is high.
The interest rate determines the opportunity cost (alternative investment) of each project.