Question

Briefly discuss how to identify good investments. What are some of the criteria you would use to make this decision?

Answer 1

Investment decisions also can be called ‘capital budgeting’ in financial terms. Capital investment decisions aim includes allotting the capital investment funds of the firm in the most effective manner to make sure that the returns are the best possible returns. Assessing projects as well as the allocation of the capital depends on the project requirements are some of the most crucial capital investment decisions aspects.

There might be many different criteria’s for choosing the appropriate and right capital investment decision. For e.g., a company might stress on projects that assure for prompt returns while a few other companies might assert on projects which ensure for a growth in the long term. The important aim of capital investment decision is increasing the firms’ value by taking on a good project at the perfect time.

The power to study as well as take capital investment decisions permits an individual as the manager or owner of a particular business to make sure that their resources which are limited are apportioned to the project(s) which would best accomplish their strategical goals (thus they also are at times denoted as strategic capital investment decisions). These kinds of decisions could be associated to capital investments decisions like constructing a new factory, dedication towards a new campaign for marketing, acquiring a business or developing or creating a new website.

The aim of a business while making capital investment decisions is maximising the wealth of the shareholder by acquiring assets and yielding profit and to be able to do this, as the owner of your business, you should to be able to find out and determine as to what projects of capital investment would yield a cash flow which is positive and when there are constrained resources, as they generally are in case of start-up or small business or usually for most of the businesses that are facing the credit-crunch, rate the projects in the bases of priority depending on the kind of value they generate.

Capital investment decisions mostly are regulated by the procedure of rating and identifying the organization's capital investments. The company ought to decide as to which of the capital investments that are given, would ensure the maximum value to their business and thus they can make their capital investment decision.

The capital investment decisions suffer from a many constraints generally. The sum of capital which an organization collects is restricted and thus it gets the restraint on the firms’ choice down to an extent, over several project investments. When the firms’ debt is raised, the firms’ debt-equity ratio too is increased and thus it gets hard for a business to be able to increase more debts.