Question

It is customary to think about investments as falling into one of three groups: revenue-enhancing, cost-reducing, and mandatory describe what each of these categories mean and give an example.

Answer 1

Investment could be categorised based upon different features like-

1. Cost reducing-an investment is to be considered good, if it is leading to reduction in the overall cost of capital of the company at the present or in the future.

For example the expenditure which are made on some research and development that would lead to dramatic cost cutting for the company by improving the waste management.

2. Revenue enhancing-projects which lead to enhancement of the overall revenues of the company will also need to be considered because if the revenue is being enhanced that means the profits are enhanced if cost are managed effectively.

For example introduction of Hollywood celebrity for marketing strategies that would help in revenue enhancement of the total project.

3. Mandatory-there are mandatory projects which are to be undertaken. they could be in accordance with certain regulations which are specified by the government or they could be under compliance of certain rules and regulation by societal norms which should be followed by an ethical organisation.

Example- environmental costing is to be adopted while costing of different processes.