Question

What is capital investment decisions?

Answer 1

Capital investment decisions are aimed at the expansion of operation levels thus involves the management team judgements in regard to how company's funds will be spent to procure capital assets. There are a several factors that management need to consider when making capital investment decisions, such as:

-- Whether a projected will raise the sales for which capacity is being increased will actually occur.

-- How well an investment fits into the long-term decision of the company?

--Whether the investment will enhance the capacity of the business bottleneck operation, thus improving the throughput of the organization.

--Whether an investment for the replacement of an asset can be deferred by improving the maintenance of the existing asset.

-- Whether the investment is needed by regulatory requirements, irrespective of the investment return.

--Whether a projected enhancement in fixed assets will increase the breakeven point of the company, requiring the company to generate more sales before it can earn a profit.

--Whether the company has sufficient funding available for payment of the assets that business wishes to acquire.

--Whether the cash flows from the investment will provide a positive return on capital investment.