THE INFLUENCE OF MONETARY POLICY ON INVESTMENT DECISION IN THE EURO ZONE

Transcription

1 THE INFLUENCE OF MONETARY POLICY ON INVESTMENT DECISION IN THE EURO ZONE Valenin Mihai LEOVEANU Anca BRATU Absrac The paper aims o highligh and analyze he main heoreical and pracical aspecs regarding he relaionship beween invesmen and moneary policy, as moneary policy decisions had a greaer or lesser relevance on invesmen decisions. Firs, he auhors make a shor review ino he heoreical analysis of inerconnecions beween money and invesmens, and hen hey ry o reveal how he moneary policy influences he invesmen decisions hrough he ransmission mechanism channels. The effec of moneary policy measures on invesmen decision is followed by he auhors on hree levels of analysis: he selecion of invesmen projecs, he choice of sources of financing and he measuremen of risk. Keywords: Moneary policy ransmission mechanism, capial budgeing, cos of capial, invesmen decision.. Inerconnecion beween moneary policy and invesmens In he economic sense, invesmens can be defined as oal expenses for he accumulaion of capial goods by creaion, modernizaion or replacemen of fixed asses in order o obain fuure cash flows. This definiion highlighs he feaure of cerainy of he invesmen expense made oday agains he characer of uncerainy in obaining fuure cash flows. In his regard, here should be made delimiaion beween invesmens in real asses and invesmens in financial asses. While he firs helps o increase invesor wealh, ohers express how i finances firs and reflec he conribuion of capial providers (shareholders or crediors) o heir creaion. This paper refers only o invesmens in real asses. From a macroeconomic perspecive, he invesmens are a componen of GDP in aggregae demand, so hey have a direc and immediae impac on i, in ha an increase in invesmen increases GDP, oher hings being he same (ceeris paribus). Moreover, since income (GDP) is an imporan deerminan of consumpion, revenue growh will be followed by an increase in consumpion, so ha here is a posiive feedback beween consumpion and income hrough invesmens. Due o his mechanism, impors will increase and, as a resul, will grow also invesmens based on equipmen, machinery and foreign echnology. Thus his will conduc o an increase in real ineres raes which in urn depends on he deliberae choice of he cenral bank o increase or nominal money supply. Therefore, increasing he real ineres rae is an inflecion poin leading o compression of invesmen, which in urn hampers GDP growh. Through heir shor and violen flucuaions, invesmens are paricularly an imporan economic variable of he business cycle. During economic expansion, invesmens grow a a much faser pace han consumpion or GDP, regardless of ineres rae movemens. In conras, on inflexion poins of he economic siuaion, he influence of ineres raes on invesmen is significan. During peak growh, he significan increase in ineres raes would muliply disadvanageous he cos of credi for invesmen, reducing heir dynamics. Invesmens ofen reach climax sooner han GDP, riggering a negaive muliplier of consumer income and hereby simulaing he economy o go hrough a downurn. In imes of depression, he emergence of low ineres raes on he credi marke is a welcome hing for companies, which in combinaion wih any posiive expecaions regarding he economy going, can cause an increase in he low level of invesmen during he recession. On he oher hand, invesmens in machinery and equipmen may know, in conras, a decline as economic recovery leads o he use of exising capial, no fully unapped. In analyzing he inerconnecions beween money and invesmens, i is necessary o define moneary policy. Componen of he mix of sabilizaion policies, moneary policy is an economic policy by which he moneary auhoriy of a counry conrols he supply of money in he economy and which is used o promoe cerain endpoins such as price sabiliy, growh and employmen. Alhough mos economiss consider ha moneary policy has a major impac on macroeconomic performance, here are significan differences in erms of decisions and acions o be aken ha reflec a number of disagreemens on economic policies, expressed hrough hree macroeconomic models. The models chosen o represen economic srucures ha consrain moneary auhoriy in choosing is policy focus on inflaion, unemploymen, income disribuion Assisan Lecurer, PhD Faculy of Adminisraion and Business, Universiy of Buchares ( v.leoveanu@yahoo.com). Associae Professor, Faculy of Adminisraion and Business, Universiy of Buchares ( ancabrau2004@yahoo.fr).

2 Valenin Mihai LEOVEANU, Anca BRATU 809 and growh, whereas, poenially, moneary policy affecs all (Palley, 2007). The Neoclassical economic model (Palley, 2007) dominaed hinking abou macroeconomics and moneary policy o he financial crisis in This model considers ha moneary policy conrols inflaion hrough nominal ineres rae, which deermines he nominal rae demand growh. In his conex, moneary policy may have an unanicipaed shor-erm impac on inflaion, unemploymen, income disribuion and economic growh. Anicipaed moneary policy affecs inflaion in he long erm. Unlike unanicipaed moneary policy, anicipaed moneary policy is characerized by ha moneary auhoriies should pursue an objecive of sabilizing he price level and a rule of seady growh in money supply. The model considers inflaion as a negaive facor, as "bad" and herefore moneary policy aimed price sabiliy (zero inflaion) o avoid unconrollable inflaion developmens ha can enice employees and companies in making inefficien decisions on labor and invesmen. Where deflaion becomes a problem due o low nominal ineres raes and here is also uncerainy abou he impac of moneary policy on aggregae demand, hen moneary policy will choose a arge of posiive inflaion o proec he economy from he emergence of deflaion (Palley, 2006). This seems o be he curren hinking of cenral banks boh in he US and in Europe, where wo percen inflaion arge for moneary policy has become he norm. The Neokeynesian model was dominaed economics and economic policy decisions from early 50s o lae 70s and i is now a heoreical framework for he sudy of inflaion and he business cycle of mos cenral banks in he field of modeling. The implicaions are ha moneary policy can impac boh on he shor and on he long erm he unemploymen, he real wages, he income disribuion and he capial-labor raio. Their long-erm value depends on he size of he porfolio subsiuion beween money and capial goods, in response o inflaion. However, moneary policy can no influence he rae of long-erm growh and is impac in he shor erm on real wages is negaive, so ha opimal moneary policy depends criically on he preferences of policy makers on inflaion and unemploymen. The Poskeynesian model analyses he microeconomic fundamenals differenly from Neokeynesian model (Palley, 2007), alhough i reaches some similar conclusions. In his model, he moneary policy no only influences inflaion, bu i affecs, oo, unemploymen, real wages and profi rae and growh rae. This is why moneary policy is considered o be so imporan. A high raes of unemploymen, he only cos of expansionary moneary policy is higher inflaion. However, when he unemploymen rae drops here may be a compromise beween higher wages and lower unemploymen han higher inflaion and lower growh, a poenially unfavorable siuaion. The shapes of he profi rae and he growh rae funcions are imporan, and hese in urn depend largely on he wage curve shape. I seems he curve wages, he profi rae funcion and he growh rae funcion are relaively fla, which indicaes he likelihood compromise beween unemploymen and growh (Palley, 2007). 2. Transmission mechanism of ECB moneary policy As an EU insiuion, he European Cenral Bank (ECB) is he moneary auhoriy of he single currency zone in Europe (Euro zone). ECB is he hear of he Eurosysem - he cenral banking sysem of he euro area ha includes also he naional cenral banks (ECB, 206a). Unlike he Federal Reserve (formed by welve regional cenral banks of U.S.A.) and Bank of England (he cenral bank of he Unied Kingdom) who have more sauory objecives han one, he main objecive of ECB is o mainain price sabiliy as essenial pillar for economic growh and job creaion wo of he European Union s objecives (Aricle 27 of he Treay on he Funcioning of he European Union). The ECB has also specific asks in banking supervision, banknoes emission, saisics collecing and processing, macroprudenial policy and financial sabiliy as well as inernaional and European cooperaion (ECB, 206a). The ECB main body of decision aking is he Governing Council having as objecive keeping inflaion below, bu close o, 2% over he medium erm. In order o achieve is primary objecive, he Governing Council bases is decisions on a wo-pillar moneary policy sraegy and implemens hem using is operaional framework (ECB, 206a). The ECB's moneary policy sraegy is inflaion argeing and based on he definiion of price sabiliy as a year-on-year increase in he Harmonised Index of Consumer Prices (HICP) for he euro area of below 2%. The implemenaion of ECB inflaion argeing sraegy is made by a se of moneary policy insrumens explained in he General documenaion on Eurosysem moneary policy insrumens and procedures (ECB, 206b). The process hrough which moneary policy decisions affec he economy in general and he price level in paricular is named he ransmission mechanism (ECB, 206c). Considering a funcional perspecive, here are wo sages of moneary ransmission. In he firs sage, moneary policy measures have an impac on various segmens of financial markes, which is refleced in he adjusmen of marke raes and asse prices, in exchange raes and oher financial condiions (e.g. mauriy srucure). In he second sage, hese changes aler he propensiy o consume of he economic agens and hus hey affec he value of asses and incomes. In he laer segmen here is an imporan way in which moneary policy affec he invesmen behavior of firms. Privae

3 80 Challenges of he Knowledge Sociey. Finance and Accouning invesmen is a highly volaile componen of aggregae demand, having an imporan role in economic growh and employmen. Moneary policy is essenially relaed o he real economy by he ineres rae channel affecing all asse prices, he ne value of balance shee iems, as well as banks' lending behavior. An imporan feaure of he radiional ineres rae channel is he primary focus on real ineres raes raher han nominal raes and he role of long-erm ineres raes. Shor-erm ineres raes are considered he deermining facor in his process. In fac, hese ineres raes perform hree disinc funcions:. affecs he presen value of ne benefis over ime hrough he discoun rae applied in invesmen selecion; 2. deermines he cos of financing by bank loans and he rae of reurn demanded by shareholders, and 3. srongly influences he economic climae, boh as regards financial markes and real goods and services markes. Besides he ineres rae on shor-erm influencing decision-making firms, household and governmens, here is a range of ineres raes on differen mauriies ha are configured according o he moneary policy ineres rae affecing deb managemen decisions. As aggregae demand is deermined by long-erm evoluion of real ineres raes, he erm srucure of ineres raes becomes an imporan role in making moneary policy effecive saring from he moneary policy ineres rae. Indirec influence of he cenral bank on long-erm ineres raes sems from he fac ha hese raes are se by marke paricipans as a weighed sum of he expeced shor-erm ineres raes, over which he moneary auhoriy acs direcly. Bond yields are deermined by he offse componen of inflaion demanded by invesors for holding hese long-erm insrumens. Thus i is performed he srucuring of erm ineres raes from hose on long-erm o hose on shor-erm. In his way, he yield curve, alhough i relaes only o fixed income insrumens bu wih high share in he financial marke, is significan for he enire loan marke. The influence of he ineres rae channel on he economy can be revealed as follows. A reducion of moneary policy ineres rae lowers ineres raes on shor-erm marke, so i is expeced o increase invesmen. Whereas cumulaive invesmens increase he capial sock and open he way o improve producion condiions. Producion capaciy, produciviy poenial, cos efficiency and qualiy of producion will rise o he exen ha he invesmens were argeed and implemened. As a resul, expor compeiiveness will increase, and, hus, employmen will increase. Regarding anoher componen of he moneary policy ransmission, namely he credi channel, i includes mechanisms by which imperfec financial markes amplify he effecs of convenional ineres rae. The bank is a financial inermediary ha collecs money from economic agens wih liquidiy surplus and ransfers hem according o heir analysis and decisions o businesses wih liquidiy defici, hus making ransformaion of mauriies, ineres raes and risks. Therefore, he lending decision is he prerogaive of banks. Considering imperfec financial markes, he cos of exernal funding is greaer han he risk free ineres rae, given he exisence of informaion asymmery hrough is forms called adverse selecion and moral hazard. The risk-free rae of reurn is he heoreical rae of reurn of invesmen wih zero risk as he governmen bonds. Informaion asymmery reflecs he fac ha he credior does no know if he debor is in good faih or no (adverse selecion), or he debor has chosen o inves in a riskier projec han for which i received funding (moral hazard). In his case, he borrower will have o pay an addiional premium o cover expeced coss of he credior, such as he risk of opporunisic behavior occurred as a resul of he debor and he coss of monioring, assessmen and collecion of paymen of he remaining deb. An increase in he moneary policy rae will have a direc impac on all companies ha rely on bank loans or loans of any kind as o ineres raes in he money marke. An increase of ineres bank loans leads o lower businesses margin and increases he reurn expeced by invesors from new invesmen projecs, which makes hem less likely o engage in such projecs. Ineres expenses also affecs invenory managemen coss ha are usually funded by bank loans. The credi channel implies ha a segmen of companies mus rely on bank loan financing. If moneary policy measures end up by resricing banks' abiliy o give loans, he financial coss of hese borrowers will end o increase, while demand for capial will decrease (Leoveanu, 205). In pracice, a cenral bank influence on he real coss of financing is quie limied. In he long erm, rying o push real ineres raes on he capial marke under heir equilibrium rae - he characerisic applying an expansionary moneary policy measures - will only lead o an increase in inflaion. Unlike bank lending channel, he balance shee channel means ha he debor's financial siuaion has an impac on exernal finance premium. Bank lending o companies, especially smaller ones like SME, are ofen backed asses, so a decline in asse prices may lead o difficulies in accessing loans because low prices of asses reduces ne asses of he company. This effec is called he "financial acceleraor". Also, he financing of lised companies is easier o achieve when ineres raes are low and asse prices are high, so ha he financial saemens are favorable. There are some specific issues regarding he ransmission mechanism of moneary policy in Euro zone afer inernaional financial crisis ha are largely

4 Valenin Mihai LEOVEANU, Anca BRATU 8 debaed by economiss. Peer Prae, member of he Execuive Board of ECB, has shown (Prae, 206) ha in he financial crisis afermah - characerized in Europe by banking and soverign deb crisis, deleveraging process and slow economic recovery, desinflaionary shocks and challenges on he effecive lower bound on he ineres rae - he ECB had o require unconvenional measures wih unprecedened inensiy in order o address fricions in he ransmission process. Kapounek highlighs ha he mos imporan problem of moneary policy implemenaion efficiency is ransmission mechanism heerogeneiy in he Eurozone. The heerogeneiy consiss in differen economic growh and inflaion raes in individual member saes (Kapounek, 20). Roman (205) shows ha his research finds a high efficiency loss in all moneary ransmission channels relaed o fracional reserve banking, excessive EU indebedness, or legal frameworks. 3. ECB moneary policy and invesmens performance in he euro area The inernaional financial crisis pu his mark on euro zone economies also by depressing invesmens as a resul of uncerainy, corporae and banks deleveraging needs and foreign direc invesmen abroad (Palenzuela e al., 206). IMF researchers finds ha despie lower nominal ineres raes during he crisis, he overall decline in inflaion and he zero lower bound for he nominal ineres rae held up he implied real ineres raes, paricularly in some counries, which also may have weighed on business invesmen (IMF, 204). Since 203 here was an economic recovery in euro zone despie a weaker global growh oulook, as shown in Figure. Fig. Euro area real GDP Fig. 2 Real oal and business invesmen in he euro area Fig. 3 Breakdown of real oal invesmen in he euro area Source: ECB, Business invesmen developmens in he euro area since he crisis, p. 2, hps:// The Figures 2 and 3 presen he evoluion of real and business invesmen in euro area: he big falls of oal invesmen in he afermah of he crisis and also in were followed by a general increase of oal fixed capial formaion since early 203. The expansionary moneary policy measures of ECB influenced financial coss for non-financial companies in euro zone since he crisis, bu here sill remain a lo of credi consrains imposed by banks in spie of heir declining (Fig. 4) Fig. 4 Nominal cos of exernal financing for euro area NFC s Source: ECB, Business invesmen developmens in he euro area since he crisis, p. 0, hps:// Source: ECB Annual Repor 205, p. 22 The invesmen recovery was based on a combinaion of improving demand, profi expecaions and financing condiions, as well as declining uncerainy despie he high corporae debs and resricive bank regulaions (ECB, 206d). The linkage beween moneary supply (M3) and loans o privae secor is presened in Figure 5. Money growh remained robus. Credi growh recovered gradually, bu remained weak (ECB, 206e). The fuure prospecives for growing developmen of invesmen in euro zone, especially business invesmen, rely on favorable facors like recovering demand, accommodaive moneary policy and improving financing condiions bu also and he need o replace capial afer years of subdued fixed capial formaion despie negaive consrains like deleveraging needs and a sill unfriendly business environmen in some counries, as well as subdued poenial growh prospecs (ECB, 206d).

5 82 Challenges of he Knowledge Sociey. Finance and Accouning Fig. 5 M3 and loans o privae secor Source: ECB, Annual Repor 205, p The effec of ECB moneary policy on invesmen decision Moneary policy is expeced o influence invesmen decision by modifying he rae of reurn on capial, remodelling he availabiliy of bank loans o he economy, and affecing expecaions and confidence on macroeconomic fundamenals. Firs, he ECB moneary policy measures have an impac on financial condiions in he euro area, which in urn is coupled wih he counry-specific economic condiions. The effecs of moneary policy are seen primarily a macroeconomic level as an ECB commimen o fulfill is primary objecive of mainaining price sabiliy and supporing he economies of he euro zone counries, wha is he basis on which hey form invesors expecaions. In his respec, he informaion provided by he ECB and he ransparency in communicaion wih he public deermine he credibiliy of he cenral bank and is one of he mos powerful and effecive moneary policy ool. Inernaional financial raing agencies (i.e. Sandard & Poor's, Moody's, Fich) ake also ino accoun he ECB policy decisions in order o classify he counries economies, companies and financial insiuions in he euro area by risk degree. This kind of classificaion gives invesors informaion on how much confidence o have abou heir financial performance, fulfillmen on heir financial obligaions, as well as heir more difficul or easier access o financing on inernaional markes. Therefore, before aking an invesmen decision, invesors will look a he raing given by inernaional raing agencies o heir economic parners in he euro zone, raing influenced by he moneary policy of he ECB. Secondly, invesmen decisions are based on capial budgeing process hrough which he evaluaion of invesmen projecs is based on specific selecion crieria, among which highlighs he Ne Presen Value (NPV) and Inernal Rae of Reurn (IRR). A capial invesmen projec is a se of fixed asses which are coningen upon each oher and which are couned ogeher. Thus, he company asses a a cerain ime are he amoun of capial invesmen decisions aken over ime by he company. The invesmen process involves annual invesmen coss during consrucion period and annual benefis during he operaion period of a capial invesmen. Analysis of differen invesmen projec alernaives will consider ime value of money and will compare he coss as relaed o effors and benefis as relaed o expeced effecs a a given momen in ime. This is he mehod of discouning cash flows. Fuure cash flows are discouned a a rae which is an assessmen of he invesors' uncerainy on he expeced amouns and on he ime of heir achievemen. To esimae he risk from hese cash flows requires a sensiiviy analysis of he income and expenses from changes in economic condiions. The risk of an invesmen projec is refleced in his discoun rae. From he invesors poin of view he discoun rae is he minimum rae of required reurn o compensae hem for he risk involved. From he company poin of view he discoun rae is he weighed average cos of capial, i.e. he opporuniy cos of capial invesed in he firm. In oher words, i shows how much cos he company o bring addiional funding of a moneary uni of new capial. As a resul of boh asserions, WACC represens boh he cos of capial and he minimum rae of required reurn for an invesmen projec. Thus, hirdly, he influence of ECB moneary policy is manifesed on WACC componens: he cos of deb and cos of equiy. WACC calculaion is done by adding he cos of each componen of capial muliplied by he weigh of he componen in oal funding. E D WACC = Re Rd ( T) V V where: Re = cos of equiy; Rd = cos of deb; E = marke value of he firm's equiy; D = marke value of he firm's deb; V = E + D; E/V = percenage of financing ha is equiy; D/V = percenage of financing ha is deb; T = corporae ax rae (Invesopedia, 206). The cos of each componen of he invesed capial is calculaed as below. A. The cos of deb Cos of deb is calculaed for each credi insrumen used by he company in is funding and consider he marginal rae of corporaion ax: Rd ( T) Formula is he ineres rae deb minus he marginal corporae ax as a fac ha ineres expense is ax deducible. B. The cos of equiy The heoreical approach o consider cos of equiy as a cos of reinvesed capial is expressed by using Capial Asse Pricing Model (CAPM): Re RFR (Rm RFR) i

6 Valenin Mihai LEOVEANU, Anca BRATU 83 where: RFR = risk free rae; i = bea coefficien ha measures he volailiy of company s securiy volailiy compared o he marke as a whole; Rm - RFR = marke risk premium, and Rm is marke reurn. The model shows difficulies and even limiaions in esimaing risk-free rae, marke reurn or bea coefficien. The effecs of ECB moneary policy is manifesed parly in deermining he appropriae risk-free rae of reurn, due o he relaive influences of moneary policy rae on yield curves. Thus, a benchmark for RFR could be he Yield-o-mauriy of bonds wih he lowes risk in he euro zone, for example he YTM of German bonds issued for a period of 0 years. Among selecion crieria of an invesmen projec, here are Ne Presen Value (NPV) and inernal rae of reurn (IRR) as he mos imporan ones. Ne presen value is he overall reurn of an invesmen, calculaed by summing he presen value of all fuure cash flows (posiive - meaning benefis or negaive - represening invesmen coss or losses) arising from he implemenaion of he projec. n CF CF CF CF CF 0 2 n VAN n ( i) ( i) ( i) ( i) ( i) where: CF = esimaed cash flows in he period ; CF = VT CT, where VT = oal revenues in he period CT = oal expenses in he period including invesmen coss (I ) and operaing coss (C ) ; i = discoun rae; n = projec lifeime. If he projec generaes cash flows greaer han necessary o compensae invesors for he risk of he projec, i will bring a higher gain han he cos of capial, increasing he company value, which reflecs he posiive value of ne presen value obained from he projec (NPV> 0 ). Conversely, if he projec cash flows are less han needed o cover he cos of capial ha will decrease he company value, as i is highlighed by he negaive ne presen value obained from he projec (NPV <0). NPV value depends on he discoun rae value used in he calculaions, which requires special aenion in choosing i. Thus, if he discoun rae is lower, he NPV is higher and vice versa, which has a significan impac on capial budgeing (Leoveanu, 2008). IRR is he discoun rae ha makes he presen value of expeced cash inflows equal o he presen value of esimaed fuure cash ouflows for he invesmen projec in quesion. To calculae his indicaor, he NPV mus be equal o zero for a discoun rae i = IRR, and herefore: n CF 0 ( RIR) 0 When IRR is used as a crierion in he invesmen projecs evaluaion hey shall consider he followings: a) IRR mus always be greaer han zero (> 0), oherwise invesmen coss can no be recovered from benefis and he projec is no acceped; b) hey accep projecs wih calculaed IRR > demanded IRR by he invesors; c) in relaion o he cos of capial, he IRR should be considered as he maximum rae o pay off he capial providers (shareholders and crediors), wihou he projec o produce any benefi or any loss. Thus, hey will accep projecs wih IRR > cos of capial and will rejec hose wih IRR < cos of capial (Leoveanu, 2008). The invesmen decision is reached by comparing he values of indicaors calculaed on differen varians of invesmen projec in conras o he curren siuaion wihou he invesmen projec (Leoveanu, 205) Example In he curren inernaional economic condiions, companies are concerned abou he feasibiliy of invesmen projecs developing producion/services for expor or replace impor of such goods/services. In his respec i appears necessary o analyze several aspecs: he value of currency earned / saved by he invesmen compared o he currency marke; he exen o which his value (cos) of currency is accepable for he invesor; a wha cos of domesic currency is expor or impor quiing advanageous by making ha invesmen in ha counry. The main crierion ha he invesor will ake ino accoun in his case is he Michael Bruno es raio. This indicaor enables invesmen decisions by avoiding invesmens wih a higher cos of foreign currency. For compuing, he necessary informaion are: annual inflows in foreign currency on projeced expor sales, respecively annual inflows in foreign currency on projeced savings by reducing impor; annual ouflows in foreign currency on invesmen and operaing coss; annual ouflows in local currency relaed o he invesmen and operaing coss. A German invesor wans o make a capial invesmen in Germany o manufacure producs ha will be fully expored o he Unied Saes. To esablish he feasibiliy of he invesmen, he invesor will calculae he Michael Bruno es raio, knowing, on he one hand, he invesmen and operaing coss in Euro and, on he oher hand, he invesmen and operaing coss, and also he operaing revenues in Dollars (see ables below). Consrucion ime is 2 years, and operaing period is 6 years. The discoun rae calculaion is based on he weighed average cos of capial. In his regard, i is known ha he invesor finances he invesmen in proporion of 55% by reinvesing capial, in proporion of 20% hrough a bank loan erm a a German bank and in proporion of 25% by a suppliers credi for equipmen. The ineres rae on he bank loan for invesmen = 4.5%, he ineres rae on he suppliers credi = 5%, RFR = 0.3% (German Bond 0 T), bea coefficien =.5 and he risk premium marke (Rm - RFR) = 7.8 %.

7 84 Challenges of he Knowledge Sociey. Finance and Accouning The corporae ax rae T = 8%.For he one year ( ) he average euro/dollar currency rae of he ECB was.084 euro/$. Soluion:. Cos of capial compuaion Cos of bank loan: Rd ( T) = 4.5% 8% = = 0.8% Cos of suppliers credi: Rd ( T) = 5% 8% = = 0.9% Cos of reinvesed capial: Compuaion of Presen Value of Toal Coss (mil. euro) Year () Invesmens Coss (I ) Operaing Coss (C ) Compuaion of NPV (mil. $) Year Invesmens () Coss (I ) Re RFR (Rm RFR) = 0.3% +.5 i 7.8% = 0.20 = 2.00% Weigh Average Cos of Capial: WACC = % % % = 0.07 = 7% This value of WACC represens he minimum rae of reurn required by invesors and also he discoun rae a which capial budgeing calculaions are made (WACC = i). 2. Capial Budgeing Michael Bruno Tes Raio = PV of Toal coss (euro) NPV (dollars) Discoun Facor ( i) Presen Value of Toal Coss (I C ) ( i) Oparaing Coss (C ) Operaing Revenues (V ) Cash Flow (CF ) Discoun Facor ( i) Discouned Cash Flow CF ( i) , , NPV = Michael Bruno Tes Raio = mil euro euro/$ mil $ This resul will be compared wih he ECB exchange rae o see if he invesmen projec can be acceped for he gain brough by exporing. For an average ECB exchange rae of.084 euro/$ he invesmen projec is cos-effecive because i brings he dollar ino he counry a a much lower cos ( euro/$). 3. Conclusions The presen paper had he inenion o presen some imporan feaures concerning invesmen in real asses and he implicaion of moneary policy measures in invesmen decision in euro area based on he heoreical framework regarding capial budgeing. As essenial issues for his subjec, he auhors highlighed he folowing: he imporance of he hree models represening economic srucures ha consrain moneary auhoriy in choosing is policy and heir differencies of approach. he characerisics and disincions beween he inerconnecion moneary policy invesmen in ime of economic grow or recession and depression. he imporance of ECB as main insiuion of he Eurosysem for euro zone economies considering is objecive and is moneary policy sraegy. he main sages of moneary policy ransmission mechanism and he way ECB moneary policy could influence economic developmen in euro area; he pariculariies of ineres rae channel, credi channel and balance shee channel and heir imporance for invesmen rend in euro zone. he favorable and adverse facors ha have influenced and influence invesmen developmens in

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