Investment Expenditures Represent the Corporate Thesis
Excerpt from Thesis :
By lowering interest rates, the government lowers the threshold of expected return for capital investments, thus making more investments economically viable. However, such supply side initiatives are weighed by firms against the potential income. If the economic outlook - that is to say the expected demand - is poor, such that the expected return will still not exceed the cost, then the investment will not be undertaken.
In speaking with a local FedEx station manager, investment decisions are typically made at head office in Memphis. The decisions are based on expectations of future demand. Most capacity decisions at FedEx involve land and building acquisitions (new stations) or airplane leases. Thus, they are typically made on the basis of long-term demand projections. These relate to specific measures such as long-term economic growth of the region, population growth of the region and other long-term macroeconomic indicators.
The timing of decisions, however, can relate to the short-term economic situation, including the cost of capital. The company may delay investment to preserve profits during times of poor economic performance. This is because of the close correlation between the state of the economy and the firm's revenues. Moreover, the company seeks to time the completion of capital projects with the point in time when
that capacity will be needed. Therefore, an economic slowdown pushes back the time when the capacity will be needed, justifying a delay in the investment expenditure.
These reasons are similar to what has been discussed in class. The main driver is still expected future demand, as such investment decisions are almost entirely related to system capacity. One factor that was not discussed, however, was the cost of capital. In general, the firm views its operations as profitable. In other words, if they expand existing capacity, they are not lowering their return. Since the current returns are substantially higher than the cost of capital, the level of interest rates is not of direct concern. The only role that supply side considerations such as interest rates play is with respect to their expected impact on aggregate demand in the economy. The firm does take that into consideration in an indirect way, but it is built into the broader consideration of expected economic performance.
Piana, Valentino. (2001). Investment. Economics Web Institute. Retrieved March 26, 2009 at http://www.economicswebinstitute.org/glossary/invest.htm
MacDonald, Nadia Tempini. (1999). Macroeconomics and Business. Cengage Learning. Retrieved March 26, 2009 at http://books.google.com/books?id=MU3StwEAyz0C&pg=PA101&lpg=PA101&dq=investment+expenditure+determinants&source=bl&ots=RI6pmrsWgd&sig=KsuV03Ql501fcNRoQj6eR_EGJgM&hl=en&ei=G7rLSb7ZItuJtgfOze30CQ&sa=X&oi=book_result&resnum=7&ct=result
Cunningham, Ralph. (2008). FedEx Boss Presses for Business Tax Changes. International Tax Review. Retrieved March 26, 2009 at http://www.internationaltaxreview.com/?Page=9&PUBID=210&ISS=25204&SID=715638
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