Question

How do low interest rates affect a firm’s decisions to invest in long term assets? How does it impact financing decisions?

Answer 1

Low interest rate will be meaning that firm will be having to pay lower amount of interest on the overall loan undertaken and it will mean that there would be a inclination towards more borrowing of long term money because that will mean that firm will be able to borrow long term borrowings with lower interest rate and these long term borrowing will be helpful for firm in order to undertake high-growth project so that they can maximize their rate of return.

When there is a cycle of low interest rate, then in terms of the investment decision firm will be likely to invest less because it will be having lower return on its overall income and it will be refraining from making major long-term decisions in in terms of investing.

when there is a cycle of low growth rate, it will mean that the firm will be intended to majorly invest into long-term project by taking loan because it will have lower net cash outflows due to low outflow of interest and it will be impacting the overall rate of return and the rate of return will be going higher due to lower cost and hence the firm will be likely to add more long-term projects by borrowing long term debt.

It will be impacting the financing decision because the firm will be more likely to undertake long term projects using long term debt and paying lower amount of interest so it will mean that the financing decision of companies will be increasing in favour of long-term debt and long term projects so it can be summarised that It will be likely to invest more into the assets for a longer period of time and then firm will also be likely to undertake longer term projects.