ABSTRACT
Economists use the word ‘investment’ as a synonym for capital formation but in every day usage the term can be used to describe the purchase of stock exchange securities and other financial assets as well as purchases of land, machinery and buildings. When obsolescence dictates replacement, substitution for labour may be involved in a world of changing technology in which, generally speaking, capital intensive methods of production have been substituted for processes requiring comparatively higher labour input proportions. The decision to commit resources for investment purposes is probably the most important decision of management. Firms can draw on a variety of sources of long term capital, e.g. the retention of earnings and the raising of external finance by the issue of securities. A company using retained earnings is in fact using money withheld from its shareholders and can only justify this policy if the money can be re-invested at the cost of capital or a better return.
