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.

Related Topic:

- Investment Decision

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 shows 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 monetary 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.

 Some Related Links:      

• Investment Decision under Uncertainty

• Utility and Risk Aversion in Investment Decision

• Investment Decision

• Risk and Uncertainty in Managerial Decision Making

• Marginal efficiency of capital and rate of interest influence the investment decisions | Evaluation of Investment Project by Benefit-Cost Ratio Method

• Uses/Significance of Managerial Economics in Business Decision Making

• Measurement of Risk by Probability Distribution

Expert’s opinion survey differ from survey of Sales forces

The different between expert’s opinion and survey of sales forces can be explained as follows:

- A variant of the opinion poll and survey method is said to be expert’s opinion survey. The participants are supplied the responses to previous questions from others in the group by a coordinator or leader of same sort. The leader provides each expert with the responses of the others including their reasons.

In survey of sales forces, information is collected from firm’s sales-representatives or salesmen about their estimates of sales of its product in future.

- Outside experts such as consultant firms, investment analysts, who are professionally trained for the purpose of the forecasting demand, may be asked to estimate demand.

In survey of sales forces, information regarding likely sales is obtained from those who are closest to the market and have an initiate insight to the market.

- Each expert is told about the prediction of other experts and asked in the light of the other’s views whether he/she should revise his prediction about future demand. The experts are again shown each other’s revised forecasts and asked to reconsider their forecasts future till a consensus is reached or until referring the opinion of others.

In survey of sales forces, the responses of the various salesmen or representatives are then aggregated to arrive at total demand forecast for the product.

- Predictions of the demand by experts are not always based on any hard data but they can provide useful information about demand for the product.

Sales forecasts provided by sales representatives are biased either upward or downward. However, as a result of experience, some corrective factors are applied to sales estimates furnished by salesmen.

The merits and limitations of expert’s opinion and survey of sales forces can be explained as below:

Merits of Expert’s Opinion

1. It facilitates the maintenance of anonymity of the respondent’s identity throughout the course. This enables the respondent to be candid and forth right in his view. 
2. It renders if possible to pose the problem to the experts at one time and have their response.

Limitations of Expert’s Opinion

1. Predictions for demand by experts should always be based on some hard data, but they are not based on any hard data. 
2. It is very costly or otherwise not possible to conduct complete enumeration. Outside experts may charge huge fees for giving their opinion.
3. The experts who consider themselves experts may not like to be influenced by the predictions of others on a panel of experts. As a result, there may not be any revision in subsequent rounds of seeking their opinion about other’s forecasts.

Merits of Survey of Sales Forces

1. It is easy and cheap to do. 
2. It has further advantage of increasing the motivation of salesmen to achieve the self-selected target for which they had made a forecast.

Limitations of Survey of Sales Forces

1. Sales representatives may not provide correct forecast. Some sales representatives would like to make too optimistic sales forecast. 
2. Some salesmen would like to make too pessimistic sales forecast so that they get higher payments for exceeding the targets based on their sales predictions.
3. Sales forecasts provided by sales representatives are biased forecast either upward or downward.

  Some Related Links:      

• Demand Forecasting

• Different methods of demand forecasting

• Steps of Demand Forecasting

• Purpose of Forecasting Demand in a Business Firm

• Human resource planning is deciding in advance the future requirements of human resource in organization

• Demand Forecasting for the New Products

• Process of demand forecasting by the time series analysis