Question

Project and investment appraisal refers to evaluations of decisions made by organizations on allocating resources to investments of a significant size. Critically discuss the inclusion of investment decision.

Answer 1

Whenever a producer wants to invest capital into the markets, he needs to be aware of the market conditions and factors such as demand and supply, tastes and preferences and the overall size and profitability of the market are other important decision-making items.

This is required because as a producer, we make a profit by selling in either larger quantities or by selling at a higher price. Capital as a resource is limited and has alternative uses. The same source of capital can be used for investing in numerous market places, and the profit which each one can then earn vary.

An investment decision, helps the producer in deciding what goods and services they would produce in the market place, and the price which they should be charging from the end customer. This very evaluation allows them to know their expected profit margins at each level of production whereby they compute their costs and returns and select the best possible alternative.

A market-based demand and supply model can be used by the business owners to analyse this and to take an informed investment decision. This model helps the producers in taking a rational call towards managing their operations and is explained as follows: -

In the graph above, we see different quantities of goods being sold at different prices. The Investment decision analysis helps us know, that the demand is best fulfilled at price 10$ wherein we also make suitable profits for our business on one hand, and on the other the best possible quantity is supplied to the market place which is 20 Units.

These decisions ensure that a critical resource like capital does not get wasted and the best possible outcome is devised for the business.

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