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Factors Influencing Investment Decisions - Capital Budgeting – A Conceptual Framework
Financial Management - Capital Budgeting – A Conceptual Framework
Factors Influencing Investment Decisions - Capital Budgeting – A Conceptual Framework
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The main factors which, influence capital investment are:
Factors
Influencing Investment Decisions
The main factors which, influence capital investment are:
In modem times, one often finds fast obsolescence of technology. New technology, which is relatively more efficient, takes the place of old technology; the latter getting downgraded to some less important applications. However, in taking a decision of this type, the management has to consider the cost of new equipment vis-a-vis the productive efficiencies of the new as well as the old equipments. However, while evaluating the cost of new equipment, the management should not take into, account its full accounting cost (as the equipment lasts for years) but its incremental cost. Also, the cost of new equipment is often partly offset by the salvage value of the replaced equipment.
Many a time an investment is taken to maintain the competitive strength of the firm; If the competitors are installing new equipment to expand output or to improve quality of their products, the firm under consideration will have no alternative but to follow suit, else it will perish. It is, therefore, often found that the competitors’ strategy regarding capital investment plays a very significant role in forcing capital decisions on a firm.
The long-run forecast of demand is one of the determinants of investment decision. If it is found that there is a market potential for the product in the long run, the dynamic firm will have to take decisions for capital expansion.
Whether capital investment would be encouraged or not depends, to a large extent, on the viewpoint of the management. If the management is modern and progressive in its outlook, the innovations will be encouraged, whereas a conservative management discourages innovation and fresh investments.
Various tax policies of the government (like tax concessions on investment income, rebate on new investment, and method of allowing depreciation deduction allowance) also have favourable or unfavourable influence on capital investment.
Every firm makes a cash flow budget. Its analysis influences capital investment decisions. With its help the firm plans the funds for acquiring the capital asset. The budget also shows the timing of availability of cash flows for alternative investment proposals, thereby helping the management in selecting the desired project.
In most of the cases, investment decisions are made in anticipation of increased return in future. While evaluating investment proposals, it
The main factors which, influence capital investment are:
1. Technological change
In modem times, one often finds fast obsolescence of technology. New technology, which is relatively more efficient, takes the place of old technology; the latter getting downgraded to some less important applications. However, in taking a decision of this type, the management has to consider the cost of new equipment vis-a-vis the productive efficiencies of the new as well as the old equipments. However, while evaluating the cost of new equipment, the management should not take into, account its full accounting cost (as the equipment lasts for years) but its incremental cost. Also, the cost of new equipment is often partly offset by the salvage value of the replaced equipment.
2. Competitors ‘strategy
Many a time an investment is taken to maintain the competitive strength of the firm; If the competitors are installing new equipment to expand output or to improve quality of their products, the firm under consideration will have no alternative but to follow suit, else it will perish. It is, therefore, often found that the competitors’ strategy regarding capital investment plays a very significant role in forcing capital decisions on a firm.
3. Demand forecast
The long-run forecast of demand is one of the determinants of investment decision. If it is found that there is a market potential for the product in the long run, the dynamic firm will have to take decisions for capital expansion.
4. Type of management
Whether capital investment would be encouraged or not depends, to a large extent, on the viewpoint of the management. If the management is modern and progressive in its outlook, the innovations will be encouraged, whereas a conservative management discourages innovation and fresh investments.
5. Fiscal policy
Various tax policies of the government (like tax concessions on investment income, rebate on new investment, and method of allowing depreciation deduction allowance) also have favourable or unfavourable influence on capital investment.
6. Cashflows
Every firm makes a cash flow budget. Its analysis influences capital investment decisions. With its help the firm plans the funds for acquiring the capital asset. The budget also shows the timing of availability of cash flows for alternative investment proposals, thereby helping the management in selecting the desired project.
7. Return expected from the investment
In most of the cases, investment decisions are made in anticipation of increased return in future. While evaluating investment proposals, it
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