How risky is it for a company to spend more money on capital goods because it assumes that the economy has reached the trough of a business cycle?

Asked on by jewel2005

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The amount of risk depends to a large extent on how the company is doing financially and how much it needs these new capital goods. 

There is no way for a firm to know for certain that an economy is reaching a trough and that growth is ahead.  Experts can make predictions about things like this, but they are often wrong. 

If a firm buys new capital goods simply because it thinks a recovery is coming in the short term, it faces a great deal of risk.  If it is wrong, its new capital goods could sit idle, losing it money.  However, if the firm is in good financial shape and needs to expand in the medium term, this is not a huge risk.  If the recovery starts right away, the firm is ready.  If the recovery is delayed a few months, no great harm is done.

So, this depends greatly on the extent to which the firm will be hurt if the economy is not truly at a trough.

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