Investment Decision

The investment decision is the most important when it comes to the creation of value. Capital investment is the allocation of capital to investment proposals whose benefits are to be realized in the future. Because the future benefits are not known with certainty, investment proposal necessarily involve risk. Investment decision is the decision to reallocate capital when an asset no longer economically justifies the capital committed to it. The investment decision then determines the total amount of assets held by the firm, the composition of these assets, and business-risk complexion of the firm as perceived by suppliers of capital. Using an appropriate acceptance criterion or required rate of return is fundamental to the investment decision. Because of the paramount and integrative importance of this issue, we shall pay considerable attention to determine the appropriate required rate of return for an investment project for a division of a company, for the company as a whole, and for a prospective acquisition. In addition to selecting new investments, a firm must manage existing assets efficiently.

Financial managers have varying degrees of operating responsibility for existing assets; they are more concerned with the management of current assets than with fixed assets. Financial manager is concerned with investment decision. Investment decision most commonly known as capital budgeting decision or long term assets mix decisions. Capital budgeting is the most crucial financial decision for a firm, which includes selection of an asset or investment proposal and whose benefits are likely to be available in future over the lifetime of project. The assets can be either new or old. The first aspect of capital budgeting is the choice of the assets among various alternatives available. The acceptance of assets depends upon the benefits and returns associated with it.