The main factors which, influence capital investment are:
Influencing Investment Decisions
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.
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 is therefore essential for the firm to estimate
future returns or benefits accruing from the investment.
Tags : Financial Management - Capital Budgeting – A Conceptual Framework
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