Question

3) Why is capital investment sometimes seen as voting with your feet? ie, indicating confidence in the future of the business?

Answer 1

Management of the organization focuses on three decisions:

1. Financing decision
2. Investing decision
3. Dividend decision

These decision are taken to maximize the wealth of the investors, increasing value of firm and to provide returns to the stakeholders.

Capital investment

In investing decision, decision making on long term project is known as capital investment decision or capital investment. Management should carefully examines these decisions as they employee large portion of investors’ funds in overtaking the capital investment projects.

The purpose of making capital investment is to:

1. Increase the earning capacity of business: it means capital investment helps the increasing the scope of business of firms, that is by expanding, diversifying and much more.
2. Helps in restructuring the business: sometimes huge funds or capital investments are required to restructure (providing new shape) to business which is making loss or not performing well. Many turnaround strategies are implied to maintain or to make business profitable.
3. Aids in tapping new opportunity or to take up first mover’s advantage: capital investments are required to grab the opportunities available in the business environment to increase the revenues and profitability of business.

As an investor, one should vote for capital investment to increase his wealth in future and to maintain steady annual income.

Management should vote for capital investment to balance the risk and to earn returns.