Question

What are the six pieces of information we need to understand a proposed capital investment as described by Peter Drucker? List them and provide a short explanation of each.

Answer 1

Following are 6 pieces of information needed before making a capital investment as described by Peter Drucker:

1. The expected rate of return - The expected rate of return is the return anticipated by the investor by making a capital investment.

2. Payout or investment's expected productive period - A period of time during which benefits will be collected from an investment.

3. The discounted present value of all returns during investment's expected productive period - Discounted Present value is the value of an anticipated cash flow determined as of the date of investment. The present value of the investment must be more than a capital investment to make a profit.

4. The risk of not making an investment or deferring it- Risk of not making an investment could be quantitative as well as qualitative. For example, you if don't add servers, a customer visiting your website may face speed problems. This risk of not making an investment or deferring could mean losing a few orders from the customers or it could mean losing brand value.

5. Cost and Risk in case of failure- These are Cost/ risk involved when things go wrong with capital investments. For example, the cost of an accident caused while installing new machinery on the production line or risk of production downtime.

6. Opportunity Cost- Cost associated with not choosing the best option. If returns are far better than chasing some other opportunity, we may think of not making this one.