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Types of Investments – Expansion, Diversification, Modernization, Replacement
Businesses need to take various investment decisions from time to time to stay functional and competitive. These decisions not only increase the competitive edge of a company but also add new dimensions to the existing manufacturing and financial position of a company.
The investments needed for growth can be divided into the following four categories −
- Expansion Investments
- Diversification Investments
- Modernization Investments
- Replacement Investments
Expansion Investments
Expansion investment is made to increase the production of a certain product. It requires the firms to increase their capacity to manufacture or build a new production line to expand the current business volume. Expansion is often required when the demand is high and the product line of a company gets increased popularity in the market.
Companies seeking expansion investment are often product manufacturers and service providers. The new investment helps the company to increase its production and thereby, helps the growth of the firm.
Diversification Investments
Diversification investments are needed by companies that want to diversify their firm’s capability. Companies may want to build a new product or create a new stream of revenues using diversification investments.
There may be one or more products the company wants to manufacture for which it seeks diversification funds.
Diversification is also sometimes related to expansion where the current productivity is increased along with the introduction of new products. In such cases, diversification is known as related diversification.
If the diversification is sought to produce a completely new product unrelated to expansion, it is called unrelated diversification.
Modernization Investments
Modernization investments are used for the modernization of the plants and machinery of a firm. It may be required to install new machinery to adapt to the growing demands and meet the current demands of the product. A company often invests in modernization when the productivity has to be improved via new machinery or a new product needs new plants or machinery.
Modernization investments may also be used to diversify the product range. In such cases, the company seeks modernization investments to manufacturing and production improvements. The major aim of modernization of a company is to reduce cost by including more efficient machinery.
Replacement Investments
Replacement investments are used to replace the assets and equipment of a company in order to meet demands or to reduce the costs of a current product. Usually, assets and equipment are replaced to meet higher demands and to increase profitability. The older equipment is removed and new assets and equipment are installed to increase productivity in case of replacement investments.
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