Question

How do you turn investments into profits? Managers have to look at the acceptance criteria. Meaning what are investors willing to accept as a return and in how many years or months. What other factors must managers look at when evaluating the future value and present value?

Answer 1

Investment should be properly monitored and they should be properly managed and evaluated in order to discount various kinds of risk arising in the macro and micro environment so that they can produce a rate of return which is higher than the cost of capital because that is acceptable to investors as it is providing them with a high rate of return.

manager should be always trying to look at the acceptance criteria of capital budgeting decision making like net present value and internal rate of return or equivalent annuity method and other methods in order to evaluate these risk into the overall cost of capital so that they can proactively manage these products and discount the risk which are going to rise in the future.

investors will always be willing to accept a rate of return which is higher than the risk free rate and which is also higher than the cost of capital of the company.

manager should also be looking at various kinds of macro factors such as inflation, interest rate along with the psychology of the investors & the duration of the investors along with the political and geopolitical risk.