Investment Decisions

9 Key excerpts on "Investment Decisions"

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  eBook - PDF

  Introduction to Financial Management

  • Sudanshu Pandeya(Author)
  • 2023(Publication Date)
  • Society Publishing

    (Publisher)

  Figure 5.1. Financial judgments. Source: https://qsstudy.com/investment-decision-financial-management/. In decision-making process, neuroeconomics has also investigated the presence of financial risks, including their role within decision-making processes. Their findings have contributed proof to the body of financial literature regarding the open-to-interpretation assessment of risk within decision-making processes (Demin et al., 2018; Rustichini et al., 2005). 5.2. INVESTMENT AND DECISIONS IN FINANCE Investment Decisions are based completely on the investor’s subjective risk assessment, understanding of improved procedures, and anticipated expenses. To determine if they will make the capital spending or not, businessmen Investment and Decision-Making in Financial Management 159 would like to understand the off period (Harcourt et al., 1967). Investors must fully and accurately comprehend all of the potential prospects before making any investment choices, and hasty judgments should be avoided. A poor investment choice may even cause a company to go bankrupt. To get the most out of the assessment process, it is essential to comprehend the fundamental concepts behind investment choices. Indicators regarding investment appraisal must be selected based on the specifics of the program and the decision knowledge (Figure 5.2) (Rick and Loewenstein, 2008; Avram et al., 2009). Figure 5.2. Investing choices. Source: https://in.pinterest.com/pin/investment-decisions- ppt--420945896426540491/. Investing is the deployment of resources to recover the expenses and generate a large return over the mid to long term. Materials and human capital are also needed, in addition to financial assets. Expected outcomes are unpredictable because of how the financial and economic conditions affect investment (Avram et al., 2009; Miu and Crişan, 2011). After a thorough review of the investment proposal, judgments about investments are made.

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  Managerial Finance

  • Alan Parkinson(Author)
  • 2012(Publication Date)
  • Routledge

    (Publisher)

  The significance of the capital investment decision is thus clear. The reasons rationalizing the significance apply to longer term Investment Decisions in general although their degree of significance, and thus their degree of influence upon decision-making, will vary according to the particular type of decision and organizational activity being looked at. A common feature that all capital budgeting decisions have with shorter term investments is that managers are looking at making investments which will (hopefully!) produce returns. The distinction is that the longer term investment decision will produce returns over a number of future time periods rather than the current period returns which arise from other types of decisions.

  Capital Investment Decisions will generally be concerned with the planning for and management of activities such as:

  • the acquisition of fixed assets such as land and buildings, plant and equipment and vehicles (be it a first-time or replacement acquisition)
  • investment in a special project such as a marketing/advertising campaign or research and development
  • the expansion of current facilities, be they production or administrative or in relation to any other
  • entry into new product/service provision
  • investment in development of managers, such as yourself, through training and education.

  Such Investment Decisions are never easy Often, given the long-term nature of the decision consequences, the projected outcomes and associated returns are at best uncertain and at worst unpredictable and/ or intangible. Given this scenario it is understandable that many managers seek advice from all quarters as an aid to reducing the risk of making the wrong capital Investment Decisions. What they invariably seek is a framework, at least from a financial angle.

  A framework for predicting the future

  If you as a manager had the opportunity to design an appropriate advisory framework from scratch, it is likely that you would wish the design to help you to solve certain key problems which might hamper your effective decision-making. Perhaps the two key problems needing remedies might be:

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  Introduction to Corporate Finance

  • Laurence Booth, Ian Rakita(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  The irrevocable and unique nature of real investments has its parallel in investments in intangible assets. The decision to bring out a new soft drink, for example, with the attendant new prod- uct development costs and marketing campaign, is also irrevocable. In this case, it is almost impossible to recover the investment costs of a failed new product launch. The importance of capex decisions lies in their ability to affect the risk of the firm. In some cases, the very survival of the firm depends on the success of a new product produced from prior capex decisions. Ford, for example, was saved from extinction in the 1980s when it brought out the then revolutionary Ford Taurus, which went on to become the most popular family car in North America. Capital budgeting refers to the process by which a firm makes capital expenditure decisions, as shown below. Identify investment alternatives → Evaluate these alternatives → Implement the chosen Investment Decisions → Monitor and evaluate the implemented decisions We will focus most of our discussion on the general framework that should be used to evaluate various investment alternatives, because the remaining decisions are firm‐specific and covered in managerial accounting (which develops the firm’s control and audit systems). First, we will briefly discuss some important factors in the investment process. One of the factors contributing to improved productivity is increased investment in machinery and equipment. Conversely, one could surmise that if a firm does not invest effectively, it will find itself at a competitive disadvantage, which in the extreme will affect its long‐term survival. In the short run, poor Investment Decisions will make a firm less attractive than those that have better prepared themselves for the future. This will show up in the mar- ket price of the firm’s debt and equity securities, which will decline, and will hence increase its cost of capital.

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  Managerial Economics for Decision Making

  • John Adams, Linda Juleff(Authors)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  239 Investment Decisions You already know from previous chapters that business decisions on pricing, advertising and competitive strategy are closely linked to the nature of the market a firm operates in and to what extent that market is competitive. In addition, the source of competition may be local, national or even global – or all three. It therefore follows that the key decisions relating to expansion, new product development, staff training and any other aspect of management represent an attempt to remain competitive or become more competitive. All such decisions are essentially Investment Decisions. In this part of the text we consider why firms invest, how management can decide on the ‘best’ investment alternative and to what extent these decisions are similar as between the private and public sectors of the economy. This section is also designed to enable you to apply concepts and techniques from economic analysis to practical decision making in management and to develop your critical and analytical skills in the context of investment-related management decisions. Chapter 10 introduces the concept of investment appraisal and some techniques which are widely used in investment decision making. Chapter 11 goes on to discuss these techniques in the context of risk and uncer-tainty – a context which is typical in a globalising world and fairly typical of most of the market structures you have met in Part II. The final chapter looks more closely at the public sector in terms of the nature of public sector investment and the requirement that it meets value for money for the taxpayer – an increasingly important aspect of EU public policy. Part III 240 Further reading for Part III Chapters 10, 11 and 12 Irvin, G. (1995) Modern Cost-benefit Methods: An Introduction to Financial, Economic and Social Appraisal of Development Projects, Macmillan – now Palgrave Macmillan, Basingstoke.

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  Basic Management Accounting for the Hospitality Industry

  • Michael Chibili(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  Capital Investment Decisions 15.1 Types of capital budgeting decisions 15.2 Basic methods for making Investment Decisions 15.3 Simple and compound interest 15.4 Process of discounting 15.5 Understanding factor tables 15.6 Discounted cash flow (DCF) methods 15.7 Incidence of taxes on DCF analysis 15.8 Choosing between projects Businesses are created with the aim of existing forever. For this to become possible, the business must be able to earn profits over a period of years. In this case, short term gains might have to be sacrificed in the interest of long term goals. Decisions that involve the acquisition of equipment, land, buildings, and vehicles are examples of decisions that businesses will periodically have to make that have an influence on their cash flows. In the hospitality industry, the largest investments that are normally made will be about land or building acquisition. However these are not decisions that are made on a day-to-day basis. Whether the opportunity involves building a new hotel, modernizing an old one, or extending a hotel, money must be made available and spent on what might be called a ‘capital investment’ that is expenditure incurred now in order to produce a stream of benefits over a period of years which will, it is hoped, result in the firm being in a more favourable position. Capital Investment Decisions differ from operating decisions by reason of the nature of the expenditure and the length of time before the full effect of the decision is felt. Capital Investment Decisions may concern the following: · The acquisition or replacement of long-lived assets, such as buildings and equipment. · The investment of funds into another firm from which revenues will flow. 313 15 © Noordhoff Uitgevers bv · A special project which will affect the firm’s future earnings capacity. · The extension of the range of activities of the firm.

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  Hospitality Management Accounting

  • Martin G. Jagels(Author)
  • 2006(Publication Date)
  • Wiley

    (Publisher)

  We are not so much concerned with the budgeting process as we are with the decision about whether to make a specific investment, or which of two or more investments would be best. The largest investment that a hotel or food service business has to make is in its land and buildings, which is an infrequent investment decision for each separate property. This chapter is primarily about more frequent investment de- cisions, for items such as equipment, furniture purchases, and replacements. In- vestment decision making, or capital budgeting, differs from day-to-day deci- sion making and ongoing budgeting for a number of reasons. Some of these will be discussed. LONG LIFE OF ASSETS Capital Investment Decisions concern assets that have a relatively long life. Day-to-day decisions concerning current assets are decisions about items such as inventories that are turning over frequently. A wrong decision about the purchase of a food item does not have a long-term effect. But a wrong deci- sion about a piece of equipment (a long-term asset) can involve a time span stretching over many years. This long life of a capital asset creates another problem—that of estimating the life span of an asset to determine how far into the future the benefits of its purchase are going to be spread. Life span can be affected by both physical wear and tear on the equipment and by ob- solescence—invention of a newer, better, and possibly more profitable piece of equipment. 3. Give the equation for the payback period, use the equation, and state the pros and cons of this method. 4. Discuss the concept of the time value of money and explain the term dis- counted cash flows. 5. Use discounted cash flow tables in conjunction with the net present value method to make Investment Decisions. 6. Use discounted cash flow tables in conjunction with the internal rate of re- turn method to make Investment Decisions.

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  Managerial Economics

  The Analysis of Business Decisions

  • Stephen Hill(Author)
  • 2016(Publication Date)
  • Red Globe Press

    (Publisher)

  As we shall see, the appropriate solution to this problem is to calculate the net present value of any future money sum, so that sum is discounted according to its position on the time horizon and the opportunity cost of money. The second problem associated with a lengthening time horizon is uncertainty about the future. Different decision alternatives chosen now will not only lead to different time profiles of future money sums, but also each alternative will have a different degree of risk associated with that time profile. Then the choice between alternatives will depend not only on the preference between alternative income streams but also on the attitude towards risk of the decision-maker. The situation is further complicated by the fact that the business risk or variability of returns associated with any project will be compounded by the financial risk corresponding to the method of financing that project. Basically, the range of decision alternatives open to the firm can be increased by consider-ing the possibility of borrowing money now to finance alternatives. However, the adoption of external finance brings with it the possibility that returns generated by the project may be insufficient to repay the capital borrowed plus interest, thereby adding to the riskiness of the project. Investment refers to the current outlay of money in the expecta-tion of future gain, i.e. in anticipation of future returns being sufficient to exceed the current outlay by a margin sufficient to compensate both the risk involved and the sacrifice of the next best alternative now. At an individual level, investment refers to the sacrifice of current consumption for anticipated future gain. At the organisational level, investment is the acquisition of durable assets in the expectation of future return.

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  Advances in Mergers and Acquisitions

  • Sydney Finkelstein, Cary L. Cooper, Sydney Finkelstein, Cary L. Cooper(Authors)
  • 2015(Publication Date)
  • Emerald Group Publishing Limited

    (Publisher)

  Whilst the focus of enquiry for this chapter can be viewed within organisational decision-making framework, there is no single discrete body of literature relevant to this chapter. However, the most relevant literature from finance, strategy and decision theory is briefly reviewed. The rest of this chapter is organised as follows: What Are Strategic Investment Decisions? Success/Failure of M&A Strategies The Influence of Pre-/Post-Decision Control Mechanisms on SIDM The Role of Managerial Judgement in SIDM Conclusion 54 FADI ALKARAAN WHAT ARE STRATEGIC Investment Decisions? The incremental-adaptive model decision-making combines elements of the previous models to recognise that decision-making draws on a set of techni-ques that have both rational/analytical and power/behavioural aspects. The cognitive limitations of decision-makers are recognised, as are the variety of values, attitudes and interests amongst those involved. The outcomes of the decision-making process is thus seen as a mixture of both incremental and rational elements whereby objectives are reconsidered and sometimes reformulated as the decision progresses. The capital investment literature distinguishes between investment deci-sions that are operational in nature and those which are strategic. Operational decisions can be readily conceptualised by managers, since the risk and likely outcomes are well understood, and can usually be executed via routine (or ‘programmed’) decision-making protocols and procedures. Examples of operational Investment Decisions include the replacement or expansion of existing assets, or investments in activities, products or mar-kets that are close to the organisation’s current operations. Such decisions focus on sustaining current or ‘normal’ activities rather than initiating new, more innovative and risky endeavours. In contrast, Strategic Investment Decisions (SIDs) commit an organisation to a new strategic direction.

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  The Power of Accounting

  What the Numbers Mean and How to Use Them

  • Lawrence D. Lewis, Lawrence Lewis(Authors)
  • 2012(Publication Date)
  • Routledge

    (Publisher)

  5 Decision Making II: Capital Budgeting Decisions

  Once a decision was made, I did not worry about it later.

  (President Harry S. Truman)

  Chapter Overview This chapter discusses the time value of money and the principal capital budgeting decision models. After studying this chapter you will

  • Realize the importance of making good capital Investment Decisions;
  • Understand that, like all decisions, capital Investment Decisions should be based on incremental analysis;
  • Understand why there is a time value to money;
  • Understand how cash flows from a long-term investment are estimated;
  • Be able to calculate the present value of these cash flows;
  • Know how the net present value (NPV), internal rate of return (IRR), payback period and accounting rate of return (ARR) of a project are determined;
  • Understand the limitations and dangers of using ARR to evaluate long-term investments.

  In the previous chapter we talked about short-term decision making. In the short term, productive capacity is fixed and, as a consequence, so are certain costs. In this chapter we are going to expand our analysis by looking at decisions that have long-term implications and which frequently require large investments. These types of decisions often impact productive capacity and are generally referred to as either capital budgeting or capital expenditure decisions.

  Short Term versus Long Term Is it short term versus long term or short run versus long run? It’s both. The literature uses these terms interchangeably, so we will too.

  Many managerial accounting texts point out that in the short run many costs are fixed and in the long run few, if any, are fixed. This is true, but such a statement could lead one to the conclusion that there is only a short run and a long run and nothing in between. In reality, the budgeting process encompasses a continuum, as Figure 5.1 illustrates.

  Figure 5.1

  Capital Budgeting Decisions

  Decisions relating to capital expenditures are not easily reversible. They generally involve large sums of money and long periods of time. So a poor decision of this sort is going to cost a lot of money and it is a decision you are going to have to live with for a long time. Not surprisingly, these are often thought to be among the most important decisions an organization can make.

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