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INTRODUCTION
Financial manager always faces a wide variety of
investment alternatives specially in the case of capital investment decision It involves making capital expenditure in the initial stage of our project which are expected to provide cash inflows over a number of years Such capital expenditure may include expansion of facilities for existing product or a new product or replacement of existing facility with an improved one.
INTRODUCTION
Capital investment decision involves a large
irreversible commitment of resources that is generally subject to a significant degrees of risk Such decisions have far reaching effects on a companies profitability and flexibility over the long term
efficiently in the long term assets in anticipation of an expected flow of benefits over a series of years Investment decisions would generally include expansion, acquisition mordernisation and replacement of the long term assets Sale of a division or a business
benefits of an investment should be measured in cash In the investment a analysis it is the cashflows which is important, not the accounting profit Investment decisions affect the firms value
A firms decision to invest in long term assets has a decisive influence on the rate and direction of its growth Long term commitment of funds may also change the risk complexity of the firm Investment decisions involve large amount of funds which make it imperative for the firm to plan its investment programmes very carefully
Risk
Funding
Complexity
Investment decisions are amongst the most difficult decisions Assessment of future events which are difficult to predict
as follows:
investment:
Estimation of cashflows Estimation of the required rate of return(opportunity cost of capital) Application of a decision rule for making the choice
measure the economic worth of an investment project The essential property of a sound technique is that it should maximise the shareholders wealth The following other characteristics should also be possessed by a sound investment evaluation criterion
It should consider all cashflows to determine the true profitability of the project
Evaluation criteria
A number of investment criteria (or capital
budgeting techniques) are in use in practice They may be grouped in the following two categories
appraised has both inflows and outflows and thus, the result is a net (inflow minus outflow) present value A positive Net Present Value means that the investment increases the value of the firm This happens when the total value of the discounted inflows is greater than the outflows
Tells wether the investment will increase the firms value Considers all cashflows Considers the time value of money Considers the riskiness of future cashflows Useful for the selection of mutually exclusive projects
Disadvantages