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investment can include increases in the stocks of
towels or crockery, or training courses for staff.
There have been a number of theories put
forward to explain the level of investment taking
place within an economy. These included the
accelerator theory that relates the level of investment
to the rate of change in the level of output. It
is not the level of output that is important in
determining the level of investment, but its rate of
change. Significantly replacement investment must
take place if the productive capacity of a business
or an economy is to be maintained; because, by its
very nature, capital tends to wear out or become
obsolete during the production process. It is often
difficult to distinguish accurately between what is
replacement and what is new or induced investment.
This is because technological change occurs
over time, and a piece of capital equipment that is
purchased to replace a worn-out item may well
include characteristics deemed new investment.
Investment can only be negative at the establishment
level of analysis rather than at the national.
For instance a single business can dis-invest by
selling off some of its capital stock. However, all
businesses in an economy cannot do the same
because there would not be a market for purchasing
the capital stock that is for sale.
Investment in productive capacity is an essential
ingredient of economic growth and thus of
economic development. In most industries,
investment is a significant factor input even in the
service-based ones such as finance and tourism.
The high capital component associated with many
aspects of tourism is responsible for the high
operating leverage, and hence the drive for volume
in this industry. This is more evident in for instance
the airline and hotel sectors.
See also: foreign investment; joint venture
investment decision
JOHN FLETCHER, UK
Investment decisions are choices made relative to
the raising of funds by a company, and the
allocation of those funds within it. This capital
raising and allocation process must be consistent
with corporate objectives. Some of the investment
decisions made in a tourism enterprise might be
choosing a piece of equipment among several
alternatives, determining whether to replace old
equipment with new, and deciding which fixed
assets should be purchased under a capital
rationing situation. Capital rationing occurs when
there are limited funds for capital purposes.
Therefore, competition for available dollars exists
among the different departments and the different
projects. This makes the use of sophisticated capital
budgeting models very important.
Investment decisions in tourism and other
industries are typically evaluated by four models:
the accounting rate of return method, the payback
method, the net present value method and the
internal rate of return method. The first model
considers the average annual project income, but
does not look at cash flows. The proposed project is
accepted if it exceeds the minimum accounting rate
of return required. The payback method uses
annual cash flows from the project to offset its cost.
This determines when the investment is recovered.
There are flaws with both of these methods, as
neither considers the time value of money. In
addition, the first model uses net income instead of
cash flows, and the second does not consider cash
flows after the payback period.
The net present value model discounts future
cash flows to their present values. It is computed by
subtracting the project cost from the present value
of the discounted future cash flow stream. The
decision is usually to accept the project if the net
present value is greater than zero. If alternative
projects are considered, the one with the highest
value should be chosen. Finally, the internal rate of
return model considers cash flows and the time
value of money. It determines the rate of return
earned by a proposed project based on the cash
flows. It is computed by setting the sum of the
present values of the future cash streams minus the
project cost to zero. The discount rate is then
computed, and the project is accepted if the
computed rate is greater than the hurdle rate.
The latter is the minimum rate that a company will
consider to earn on its investments.
Further reading
investment decision 331
Coltman, M.M. �1994) Hospitality Management