INVESTMENT DECISION

FINANCIAL MANAGEMENT
GROUP-7
INTRODUCTION

 An investment decision is a well-planned action that allocates financial resources to

obtain the highest possible return. The decision is made based on investment
objectives, risk appetites, and the nature of the investor, i.e., whether they are an
individual or a firm.
 WHAT IS INVESTMENT ?
 Investment definition is an asset acquired or invested in to build wealth and save
money from the hard earned income or appreciation. Investment meaning is primarily
to obtain an additional source of income or gain profit from the investment over a
specific period of time.
NATURE

 The investment decisions of a firm are generally known as the capital

budgeting, or capital expenditure decisions.
 The firm’s investment decisions would generally include expansion,
acquisition, modernisation and replacement of the long-term assets. Sale of a
division or business (divestment) is also as an investment decision.
 Decisions like the change in the methods of sales distribution, or an
advertisement campaign or a research and development programme have
long-term implications for the firm’s expenditures and benefits, and
therefore, they should also be evaluated as investment decision
IMPORTANCE

 Investment decisions are made to reap maximum returns by allocating the right
financial resource to the right opportunity.
 A firms resources are scarce in comparison to the uses to which they can be put.
Therefore, Investment decision enables the firm to choose where to invest these
resources, so that they are able to earn the highest possible return for their investors.
TYPES OF INVESTMENT DECISION

 One classification is as follows:

 Expansion of existing business
 Expansion of new business
 Replacement and modernization
 Yet another useful way to classify investments is as follows:
 Mutually exclusive investments
 Independent investments
 Contingent investments
PROCESS

 Estimation of cash flows

 Estimation of required rate of return (the opportunity cost of capital)

 Application of a decision rule for making the choice

INVESTMENT DECISION RULE

 It should maximize the shareholders’ wealth.

 It should consider all cash flows to determine the true profitability of the
project.
 It should provide for an objective and unambiguous way of separating good
projects from bad projects.
 It should help ranking of projects according to their true profitability.
 It should recognize the fact that bigger cash flows are preferable to smaller ones
and early cash flows are preferable to later ones.
 It should help to choose among mutually exclusive projects that project which
maximizes the shareholders’ wealth.
 It should be a criterion which is applicable to any conceivable investment
project independent of others.
EVALUATION CRITERIA

 Discounted Cash Flow (DCF) Criteria

 Net Present Value (NPV)
 Internal Rate of Return (IRR)
 Profitability Index (PI)
 Non-discounted Cash Flow Criteria
 Payback Period (PB)
 Discounted payback period (DPB)
 Accounting Rate of Return
CONCLUSION

 Investment decisions are never easy.

 Cash flows, whether they are positive or negative, are fraught with uncertainty.
Selecting the appropriate discount rate is never easy, but it has a dramatic
influence on the go/no-go decision.
 Technical analysis using discounted cash flow techniques does not alleviate the
uncertainty and does not permit hunches and intuition.
 The important point is to keep ones options open and to develop a portfolio of
investment opportunities.
THANK YOU
PRESENTED BY:-HARSHIT PANDEY
SHIVA VERMA
HARSH KUMAR SINGH
HARSH BHADOURIA
AYUSH SRIVASTAV
ANUBHAV PHOGAT