Firms' Investment Decisions and Interest Rates

Tom Rosewall and Kevin Lane
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Tom Rosewall: Reserve Bank of Australia
Kevin Lane: Reserve Bank of Australia

RBA Bulletin (Print copy discontinued), 2015, 01-08

Abstract: Firms typically evaluate investment opportunities by calculating expected rates of return and the payback period (the time taken to recoup the capital outlay). Liaison and survey evidence indicate that Australian firms tend to require expected returns on capital expenditure to exceed high ‘hurdle rates’ of return that are often well above the cost of capital and do not change very often. In addition, many firms require the investment outlay to be recouped within a few years, requiring even greater implied rates of return. As a consequence, the capital expenditure decisions of many Australian firms are not directly sensitive to changes in interest rates. Furthermore, although both the hurdle rate of return and the payback period offer an objective decision rule on which to base expenditure decisions, the overall decision process is often highly subjective, so that ‘animal spirits’ can play a significant role.

Keywords: Australian firms; investment decisions; capital expenditure; business investment; interest rates; discounted cash flow; pay-back period; payback period; animal spirits; gut feel; hurdle rate; capital budgeting methods; corporate finance; behavioural finance; monetary policy (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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