CAPITAL

INVESTMENT
DECISIONS
Presented By: Michelle E. Saulog, RN
It is a process by which a company or
organization evaluates and selects long-term
investment projects that involve substantial
financial resources. These projects are typically
expected to generate returns over an extended
period of time.

An investment decision is a well-planned action

that allocates financial resources to obtain the
highest possible return.

Investment decisions are made to reap

maximum returns by allocating the right financial
resource to the right opportunity.
The distinguishing feature between short-term decisions
and capital investment (long-term) decisions is TIME.
Short-term CAPITAL
VS.
decisions INVESTMENT
(long-term)

• Short-term decisions are Capital investment decisions are:

those that involve a
relatively short-time horizon,
say one year, from the
commitment of funds to the
receipt of the benefits.
• Interest cost are normally
smaller.
• Decisions where a significant
period of time elapses between
the outlay and the recoupment
of the investment
• The commitment of funds for a
significant period of time
involves an interest cost
 Characteristics of Capital Investment Decisions:
LONG-TERM
The assetsCOMMITMENT
or projects being considered
typically have a useful life extending
multiple years. Decisions made today
can impact the company’s performance
for years to come.
IRREVERSIBILITY
Many capital investments are difficult
to reverse or liquidate without
incurring significant losses. Therefore,
careful analysis and evaluation are
crucial before committing resources.
LARGE FINANCIAL
COMMITMENT
These decisions often involve
substantial financial resources, which
may require substantial capital, loans,
or financing from various sources.
RISK AND UNCERTAINTY
There’s inherent risk and uncertainty
associated with capital investments due to
future market conditions, technological
changes, regulatory factors, and other
unpredictable variables. Assessing and
managing these risks are critical
considerations.
 Characteristics of Capital Investment Decisions:
EVALUATION
METHODOLOGIES
Various financial appraisal techniques such as Net Present
Value (NPV), Internal Rate of Return (IRR), Payback
Period, and Accounting Rate of Return (ARR) are used to
evaluate and compare different investment opportunities.
Each method has its strengths and weaknesses in
assessing potential returns and risks.
CAPITAL BUDGETING
PROCESS
Companies often employ a structured capital
budgeting process involving identification,
evaluation, selection, implementation, and post-
implementation review of investment projects.
This helps in prioritizing and allocating
resources effectively.
STRATEGIC ALIGNMENT
Capital investment decisions should align
with the overall strategic goals and
objectives of the company. They need to
support the company’s mission, vision,
and long-term growth strategy.
OPPORTUNITY COST
CONSIDERATION
Choosing one investment option over
others involves considering the opportunity
cost—the benefits foregone by not
selecting the next best alternative
investment.
 Characteristics of Capital Investment Decisions:

CONTINOUS REVIEW AND

CAPITAL RATIONING
Companies may face constraints
on available capital for
investments. Capital rationing
involves selecting the most
profitable projects when there
are limitations on resources
MONITORING
Even after the investment decision
is made and the project is initiated,
continuous monitoring and review
are essential to ensure that the
investment stays on track and
delivers the expected returns.

Successful capital investment decisions require a

comprehensive analysis of financial, strategic, and risk-related
factors to make informed choices that contribute to a
company's growth and long-term success.