Types of Investment Decisions

1. Strategic investment
strategic investment decisions often have significant consequences for the firm in terms of its market presence, success or failure of its operations as well as the fulfillment of its mid- and long-term strategic objectives.

2. Capital expenditure
Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company.

3. Inventory investment
Inventory investment is the change in the stocks of materials, works in process, and finished goods within a firm, industry, or entire economy over a specified period of time

4. Modernization investment
Modernization investments are used for the modernization of the plants and machinery of a firm. It may be required to install new machinery to adapt to the growing demands and meet the current demands of the product. A company often invests in modernization when the productivity has to be improved via new machinery or a new product needs new plants or machinery.

5. Replacement investment
Replacement investments are used to replace the assets and equipment of a company in order to meet demands or to reduce the costs of a current product. Usually, assets and equipment are replaced to meet higher demands and to increase profitability. The older equipment is removed and new assets and equipment are installed to increase productivity in case of replacement investments.

6. Expansion investment
Expansion investment is made to increase the production of a certain product. It requires the firms to increase their capacity to manufacture or build a new production line to expand the current business volume.

7. Diversification investment
Diversification investments are needed by companies that want to diversify their firm’s capability. Diversification is also sometimes related to expansion where the current productivity is increased along with the introduction of new products. In such cases, diversification is known as related diversification. If the diversification is sought to produce a completely new product unrelated to expansion, it is called unrelated diversification.

Comments

Post a Comment

Popular posts from this blog

Evaluation Criteria: Discounted Cash Flow (DCF)

 1 ) Payback period (PB) Payback is the number of years required to recover the original cash outlay invested in a project. The project would be accepted if its pay back period is less than the maximum or standard payback period set by management. As a ranking method, it gives highest ranking to the project, which has the shortest payback period and lowest ranking to the project with highest payback period. a) Constant annual cash inflows If the project generates constant annual cash inflows, the payback period can be computed by dividing cash outlay by the annual cash inflow. Payback = Initial Investment/ Annual Cash Inflow  Assume that a project requires an outlay of Rs 50,000 and yields annual cash inflow of Rs 12,500 for 7 years. The payback period for the project is: 50,000/12,500 = 4 years   b) Unequal cash flows In case of unequal cash inflows, the pay back period can be found out by adding up the cash inflows until the total is equal to the initial ...
Read more

Investment Decision Rule

There are certain rules which need to be followed while making financial decisions. Any final decision should abide by the following rules: The wealth of the shareholders should be maximized. In order to assess the project's actual profitability, it should take into account all cash flows. It ought to offer a clear-cut, unbiased method of differentiating between successful and unsuccessful projects. It should assist in project ranking based on real profitability. It should be aware that larger cash flows are preferred over smaller ones and that earlier cash flows are preferred over later ones.  It should be easier to select the project that maximizes the value of the owners from a group of initiatives that are mutually exclusive.  It should be a standard that is independent of others and applicable to any imaginable investment project.
Read more

Evaluation Criteria: Non-Discounted Cash Flow

Image
As discussed before, there are majorly two evaluation criteria for evaluating an investment decision. This blog post will be discussing the second evaluation criteria: Non-Discounted Cash Flow.  A non-discount method of capital budgeting is one that does not consider the time value of money. In other words, all currency earned in the future are assumed to have the same value as today's currency. One example of a non-discount method is the payback method, since it does not consider the time value of money. The payback method simply computes the number of years it will take for an investment to return cash that is equal to the amount invested. The computed number of years is referred to as the payback period. To illustrate, let us assume that a company invests  ₹1, 00,000 today in a project that is expected to generate cash of  ₹ 50,000 for two years followed by  ₹ 10,000 per year for four additional years. Its payback period is two years ( ₹ 50,000 +  ₹ 50,000). ...
Read more