Irreversible Investment
Categories: Investing
We all learned valuable skills on the playground, like “no take-backsies.” Such is the fate of irreversible investment.
Irreversible investment refers to the capital that a firm has invested in itself. Think: factory equipment, land rental, and other big ticket items.
The implication with irreversible investment is that, in uncertain times, firms are unsure what to do with that investment. They can’t take the investment back (no take-backsies), and yet uncertainty may mean it’s not a good time to be employing those assets.
What’s a firm to do? Well, that gets into a whole other bag of worms...playing with costs and benefits over the time horizon. Ever hear of net present value on the playground?