making investment decisions

making investment decisions 

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11/17/11 8:52 AM
Reasons why business invest
Investment or capital investment describes the process of purchasing
fixed assets, such as new buildings, plant, machinery or office
equipment. It considers the buying of any asset that will pay for itself
over a period of more than 1 year
Capital investment is undertaken for two main reasons:
To replace or renew an assets that have worn out or become
obsolescent.
To introduce additional, new assets n order to meet increased demand
for the firms products
How investment can help businesses to reach functional objectives
They can help a business to achieve not only its strategic objectives but
also a comprehensive range of functional objectives.
Investment appraisal
Major business projects involve decisions that incorporate more than
just capital equipment. Setting up new factories or stores, introducing
new products, setting up research laboratory and relocating to a new
country are all examples of major projects which businesses must
analyze using rigorous scientific techniques. Investment appraisal
ensures that investment decisions are subject to a rigorous scrutiny
before agreement
Investment appraisal is a quantitative tool in the decision-making
process. Investment appraisal recommendations should be combines
with an investigation of qualitative factors before a final decision is
reached these qualitative factors are considered later in the chapter
The three main investment appraisal techniques examined are based on
their recommendations solely on the following information:
The initial cost of the investment
The net return (revenue minus costs) per annum
The lifetime of the investment
Methods of investment appraisal
There are three main methods of investment appraisal:
Payback period
Average rate of return, or annual rate of return, or average annul rate
of return
Net present value (NPV)

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AM
Each methods provides a numerical calculation of the financial benefits
of an investment. This result can be compared with the return required
by the business and/or the results of alternative investment decisions
Payback
Payback is calculated by adding the annual returns from an investment
until the cumulative total equals the initial cost of the investment. The
exact time at which this occurs is the payback period. It is often
measured in years, but for some investments, months or weeks may be
more appropriate.…read more

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