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1. Interest rate (i): Investment is inversely related to interest rate.
2. Internal rate of Return (IRR): It is the rate of interest that equates the present value of benefits from a project to the present value of its costs. A decision to invest is based on the comparison between IRR and i.
If IRR > i, investment is made
IRR < i, no investment
IRR = i, other factors are considered in deciding whether or not to invest.
3. Expected future income flows; - if the investor expects high profits, then investment will be undertaken and vice versa
4. Initial cost of the capital good and its useful life: - if the capital good is affordable then it will be purchased and vice versa. An investor will purchase a good that is likely to last longer
5. Degree of certainty: An investor considers the risks and uncertainties involved in a particular investment. if they are high he may not invest
6. Existing stock of capital: If the existing capital is large potential investors may be discouraged. Similarly, if there is excess or idle capacity in existing capital stock, investment may be discouraged.
7. Level of income; a rise in the level of income in the economy due to rise in money wages and other factors prices raises the demand for goods and services and this in turn will induce an increase in investment
8. Business expectations; if businessmen are optimistic and confident regarding future returns from capital goods they invest more.
9. Consumer demand; If the current demand for consumer goods is increasing rapidly, more investments will be made
10. Liquid assets; If investors possess large liquid assets then their inducements to invest is high
11. Invention and innovation: If investments and technological improvements lead to more efficient methods of production, which reduce costs, the marginal efficiency of new capital assets will rise, hence firms will invest more.
12. New products; if sale prospects of the new product is high and the expected revenue more than costs, investment will be encouraged
13. Population growth; this implies that there is a growing market (demand) for goods and services that must be met by increased production hence investment will increase to provide the capital goods required to increase production.
14. Government policy: Government can encourage investment through reduction in taxes and provision of social amenities for those investing in particular sectors.
15. Political climate and stability; if there is political instability in the economy, investment will adversely be affected.
Dana05 answered the question on July 18, 2019 at 19:51