INVESTMENT DECISION Investment decision means identifying the assets or projects in which the firm s limited financial resources

should be invested. Investment decision is a choice made by a company about how to invest the capital it has at its disposal. These investments are designed to grow businesses. These decisions can be as essential to the long-term success of a company as its ability to conduct business with its customers. Making an Investment decision requires identifying company goals and establishing acceptable levels of risk. Capital can be invested with business expansion in mind or it can be used to reinforce current business operations. Companies in the modern age usually cannot sustain business through sales alone. The profits earned from those sales, along with any other sources of cash flow to which the company might have access, must be used in a way that fortifies the business against its competition. Business owners have a vast array of choices when it comes to investing excess capital. When a business owner makes an investment decision, he must sift through all of these choices in an effort to find the perfect selection. Determination of where, when, how, and how much capital to spend and/or debt to acquire in the pursuit of making a profit. Factors contributing to an investment decision include, but are not limited to : 1. capital on hand 2. projects or opportunities available 3. general market conditions, and 4. A specific investment strategy. The decision to invest depends on whether or not the expected rate of return on investment is greater than the cost of borrowing the necessary funds; or If the funds are already available whether the expected returns are higher than interest earned by lending out the funds. The following are the features of Investment Decisions: 1. The exchange of current funds for the future benefits. 2. The funds are invested in long term assets. 3. The future benefits will occur to the firm over a series of years.

Importance of Investment Decision: 1. 2. 3. 4. They influence firms growth in long run. They effect the risk of the firm. They involve commitment of large amount of funds. They are among the most difficult decisions to make.

Types of Investment decisions: Accept or Reject decision Ranking Of Alternative Investment Proposals Choice of mutually exclusive Project Expansion of existing business. Expansion of new business. Replacement and modernization.

Investment decisions can be broken into a. Strategic Investment Decisions (SIDs); and b. Tactical / Operational Investment Decisions. Strategic Investment Decisions (SID). These are concerned with investing in the long-term, wealth-creating assets of the business, such as investments in fixed tangible assets (e.g. land and buildings) or the acquisition of other businesses. Strategic investment decisions will normally involve committing very substantial sums of money to selected investment projects for long periods into the future, usually in the face of considerable risk and uncertainty. Yet, as we shall see later, it is the strategic investment decisions which have the potential for creating real value for the business, and thus wealth for its owners. It is the quality of its strategic investment decision which are absolutely crucial to the long -term success of a business. Tactical / Operational Investment Decisions. These relate to investing in medium to short-term assets such as stocks, debtors, bank, and money market deposits. These are the assets which are essential to the firm s day-to-day operations.

Importance or Need for Capital Budgeting Capital budgeting is the planning process used to determine whether an organisation's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures. Capital budgeting involves long term commitment of funds in projects having relatively long development period and as such this investment takes the form of sunk costs. The investment, thus made can not be reversed except at a considerable loss to the firm. Besides, there is also the element of risk, and uncertainty. As such , there has to be very careful planning of investment project and this needs capital budgeting. The long term implication of capital budgeting decision, thus, make it quite important Large amount of funds have to be raised from the market at a cost for financing investment proposals. It is necessary, therefore, that earning s from this investment are adequate to cover the cost of borrowing. This requires careful study of the profitability of the project which calls for capital budgeting. The firm should avoid high operating costs and idealness of capital equipment this essential to ensure adequate return on investment. Accordingly, investment decision should be based on careful calculation through capital budgeting Capital budgeting is important for the reputation the management as well. once capital investment are made, there is an expansion of the capital base of the firm and it is supposed to earn an adequate rate of return on the capital employed and that is an important indicator of its achievement. A prudent capital budgeting decision, thus, becomes very important for the management. The impotence of capital budgeting, therefore, lie in the fact that without a prudent capital budgeting the policy the firm may find its self in a disordered state of affairs. If long run capital investment are made on the bases hit and miss judgment and not on the consideration of the rate of return, the firm may be fact with the a losing project with low return at the cost for profitable ones. Capital Budgeting, thus, is a vital for the management because its brings home the fact that before making long term investment and commitment, the various alternative proposals should be examined, appraised an evaluated. As such capital budgeting has come to be regarded one of the key areas of managerial decision making.

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