Question

How does technological change influence the planning for capital spending decisions?

Answer 1

Capital investment decision are not governed by only one or two factors because investment problems are concerned with replacing an existing process in a system with another process which makes the entire system more effective.

Technological changes create new equipment which may represent major changes in process, so that the need for re-evaluation of existing capital equipment in a company. Sometimes the old equipment has to be replaced by new equipment as a result of technical innovation may be downgraded to some other application. The proper evaluation of this aspect is very important and necessary.

Long term changes in technology can influence the attractiveness of investment. If there is a slowdown in the rate of technical progress, firms will cut back investment as there are lower returns on the investment. Technological advances impact a firm's investment decisions as they affect investment cost. They can also affect the probabiliyu due to demand shocks.