Factors Influencing Investment Decision

There are many factors which directly or indirectly influence capital investment decisions besides the availability of funds to invest, profitability of the investment, market for the product, etc. They are discussed below.
  1. Technological changes: Technological development changes at present is much faster than that at past. The new technology increases the productivity of labor and capital. The selection of new technology depends on the net benefit over the cost of having the technology. Benefits from and cost of new technological change also influences the investment decisions.
  2. Competitors’ strategy: If the competitors are installing new equipment to expand output or to improve quality of their products, the firm under consideration will have no alternative but to follow suit, else it will be in loss. It is, therefore, often found that the competitor’s strategy regarding capital investment plays a very significant role in forcing capital decision of a firm.
  3. Demand forecast: The long-term demand forecast is one of the determinants of investment decisions. If the firm finds market potentials for the product in the long run, the firm will have to take decisions for investment.
  4. Outlook of management: Investment decision depends on the management outlook. If the management is modern and progressive in its outlook, the innovations will be encouraged, whereas a conservative management discourages innovations. Innovations increase the output as well as profit of the firm. The modern and progressive management takes decision to invest without any hesitation.
  5. Fiscal Policy: Various tax policies of the government relating the tax concession on prioritized investment, rebate on new investment, method allowing depreciation deduction allowance etc. also have influence on the capital investment.
  6. Cash Flows: Every firm makes a cash flow budget. Its analysis influences capital investment decisions. On the basis of cash flow budget, the firms plan the funds for acquiring the capital assets. The budget also sows the timing of availability of cash flows for alternative investment proposals.
  7. Expected return from the investment: Investment decisions are mostly done in anticipation of increased return in future. So, it is necessary to estimate future net returns from the investment proposals while evaluating the investment proposals.
  8. Non-economic factors: The factors, which cannot be evaluated in money terms, are called non-economic factors. Sometimes the non-economic factors also influence investment decisions. Working environment in the firm, safety measures in the operation of machines, brotherhoods among employees, good relationship between employer and employees etc., influences the firm’s output and also the investment decisions.

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