Factors Influencing Investment Decisions

What is the investment criteria?

• Criteria: The measures by which an investment will be judged

• A target percentage rate of return is most common in business

• Target return can be compared with the ARR, or used for the discount rate in NPV calculations

What are the non-financial factors?

• Corporate objectives- Does the investment support the key objectives (e.g. revenue growth, market share)?

• Organisational culture: What is the business’ attitude to risk-taking? How are those who make investment decisions rewarded?

What is risk and uncertainty?

• All investment decisions involve some uncertainty

• Changes in the external environment can change investment returns

• Contingency planning and sensitivity analysis can help businesses address the problems created by uncertainty

What are the key issues with making investment decisions?

• If a business wishes to grow, it needs to invest.

• The cash spent on investment in a business is normally referred to as "capital expenditure". This can be contrasted with spending on day-to-day operations (e.g. paying for materials, and staff costs) which is known as "revenue expenditure".

What is the difference between capital and revenue?

• Capital

  • Cash spent on investment in the business:

• Revenue

  • Cash spent on day-to-day operations:

What are examples of capital?

• Plant and machinery

• Factory buildings

• IT systems

• Distribution equipment

• Fixtures and fitting

What are examples of revenue?

• Raw materials

• Energy costs

• Wages and salaries

• Marketing costs

• Office Administration

What is the main difference between capital and revenue?

That capital expenditure is on non-current assets which have an "economic life" in the business – they are intended to be kept, rather than sold or turned into products

Why does a business need to invest in capital expenditure?

• To add extra production capacity

• To replace worn-out, broken or obsolete machinery and equipment

• To support the introduction of new products and production processes

• To implement improved IT systems

• To comply with changing legislation & regulations

What is the problem with most businesses?

• The finance available for capital investment is limited

• There are usually more possible capital investment opportunities than there are available finance

• So choices have to be made and some capital investments rejected