PART ONE

CHAPTER 1 – Global Spectrum of Investment

Economic growth and development depends mainly on the consistency

and limits of the capital investment, this being an axiom that can be found in all
the theories of classical economics, as well as in practice. The experience of
many countries has proved that an accelerated dynamics of growth can only be
the result of the allocation of an important percentage of the income (GDP) to
the investment sector. This is the result of the general economic equilibrium
between production and consumption, as well as of the relation between
consumption and investment. If we denote by Y the increase in production, one
can see by looking at Keynes’ formula that Y has two main destinations, which
are consumption and investments:
Y=C+I

But in order to have an investment process, we must respect the following

conditions:
 Creating the new investment capital by saving; more probable in an
economy having monetary and foreign exchange stability;
 Making the investments profitable, as nobody can afford to waste valuable
investing resources, because they are limited and they are the result of
some efforts made.

This last condition shows the importance of a successful investment

decision, decision that is based on the evaluation of that investment opportunity.
Investments, by definition, represent a present spending of money in order to get
during a tome period future returns that will pay the investor for the time he
postponed his consumption, for the estimated rate of inflation as well as for the

1
risk he is taking (Frank Reilly). The two parts of an investment, inputs and
outputs are represented by cash flows and by analyzing and comparing them, we
evaluate the investment opportunity, and decide what the investment decision
should be.
Evaluation of investments should also take into account other important
things like:
- Predicting future cash flows;
- Establishing the criteria for the evaluation of the cash flows;
- Determining the limits of acceptability for those criteria;
- Choosing the right discounting rate.
Besides these main aspects that we have considered when evaluating an
investment opportunity, we must take into consideration that the investment
decision is also influenced by other factors like:
- The time value of money;
- The economic context of the project under evaluation;
- The estimated and forecasted quality of the inputs and outputs;
- Risk;
- Inflation;
- Ways of financing;
- The measurement and accounting of the performance.

The need to invest must take into consideration a number of questions like
Where? When? How? and very importantly How much? We know that
investments are “the engine” of growth and development, but from this
unquestionable idea to putting it into practice, until achieving the investor’s
objectives, there is a long way.
At macro level of the real investments, a very important matter is
represented by the future perspectives of the investors, of a country, of a

2
national economy, but also of the global economy at present. Some of the
reasons for making investments nowadays might be:
❑ Technological progress, that allowed the development of the informational
society, this being a condition for rapid growth; and the growth has not only
rapid quantitative development, but also a qualitative one;
❑ Restructuring and modernization of the traditional and industrial sectors
(metallurgy, car construction);
❑ Formation of new economies of scale, social-economic functional systems,
based on other types of energetic resources (taking into account for example, the
limited resources of oil, that are expected to finish until the end of the next
century). This needs long term thinking and estimation, and requires long term
investments, whose methods of evaluation have not yet been very satisfactory;
❑ The infrastructure, represented by ways of communication, harbors, airports,
water supply systems, with different types of energy, different ways of mass
information and others, is very important for investments.

Whether investing directly, by holding Stock Exchange securities, or

indirectly, by saving through a pension fund or insurance company, the
individual investor is providing funds for investment in the company sector, be
it manufacturing or services.
For example, an entrepreneur setting up a business making Clujana boots
will have to provide the money needed to pay for the machinery, equipment and
other startup costs. He will invest his money at the outset in the hope that he will
earn more money in the future, thereby making an overall gain on the venture.
This type of investment is known as ‘physical’ investment because the
entrepreneur is directly involved in the physical activity of making Clujana
boots. The stock market investor, on the other hand, makes a ‘financial’
investment. He has no direct interest in the size or colour of the Clujana boots
nor of the number produced; he is only concerned with the amount of money he

3
has invested in, say, the equity or shares of the company making boots, and how
much money he will receive in the future. This type of investment is ‘pure’ in
the sense that the investor has no interest in his investment other than the future
income it will generate.