FREE online courses on Investment Appraisal - Basic Concepts of Investment Appraisal - Investment Decision

 

The investment decision is the most important of the three decisions when we consider value creation by the organization. Capital investment is the allocation of capital to investment proposal whose benefits are derived in future. Investment proposals carry risk as far as the returns are concerned, as the future is not known with certainty. Therefore investment decisions have to be evaluated with respect to risk and return. Investment decision determines the total amount of assets to be held in the business, its composition and business risk complexion as perceived by suppliers of capital. Scarcity of funds compels a firm to only undertake investment proposals on the basis of its viability. This in turn may be decided using an appropriate acceptance rule and required rate of return.

 

Importance of Investment Decisions

 

The capital investment decisions are therefore of great importance as:

 

1.                  They have long-term consequences and these decisions determine the basic character of firm or its image.

2.                  These involve substantial outlay.

3.                  These are irreversible decisions and the consequence of reversing may be too high.