Page 228 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 13: Integration of Working Capital and Capital Investment Process

Notes
Figure 13.1: Adjustment Paths towards K*

The “Keynesian” approach places far less emphasis on the “adjustment” nature of investment.
Instead, they have a more “behavioral” take on the investment decision. Namely, the Keynesian
approach argues that investment is simply what capitalists “do”. Every period, workers consume
and capitalists “invest” as a matter of course. This leads Keynesians to underplay the capital
stock decision. This does not mean that Keynesians ignore the fact that investment is defined as
a change in capital stock. Rather, they believe that the main decision is the investment decision;
the capital stock just “follows” from the investment patterns rather than being an important
thing that needs to be “optimally” decided upon beforehand. Thus, when businesses make
investment decisions, they do not have an “optimal capital stock” in the back of their mind.
They are more concerned as to what is the optimal amount of investment for some particular
period. For Keynesians, then, optimal investment not about “optimal adjustment” but rather
about “optimal behaviour”.

Self Assessment

Fill in the blanks:
11. A cash discount is tantamount to a ............................. in price.
12. A ............................. is a graph or model of decisions and their possible consequences,
including chance event outcomes, resource costs, and utility.
13. The quantity of a flow always depends on the ............................. in consideration.
14. The NPV is ............................. affected by the discount rate.

15. A ............................. method is used to estimate the attractiveness of an investment
opportunity.

13.4 Summary

 Capital investment creates the need for additional investment in inventory, accounts
receivable and cash throughout the life of the plant and equipment.
 Usually, it is assumed that the costs resulting from changes in the working capital
components or the cash benefits following from these components are imbedded in the
cash flow of the investment.

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