Capital investment decisions refer to funds that are invested in a firm or enterprise for the sole purpose of furthering the objectives of a business. Capital investment decisions may also refer to a firm’s acquisition of capital assets or fixed assets, such as machines or other products that are expected to be very productive for a business for many years in the future (“Introduction to Capital Investment Decisions”, 2017). Furthermore, capital investment decisions are crucial because the decisions will increase a firm’s value if they were to take on a large project at the right time. In return, this will allow a firm or business to make a significant amount of money over a given period. There are many factors to consider when making capital investment decisions such as quantitative and qualitative factors. Quantitative factors can be precisely measured in numerical terms and qualitative factors are measured subjectively (“Introduction to Capital Investment Decisions”, 2017). Both are major factors that contribute to capital investment decisions because quantitative factors are driven by price and expect a return on an investment while quantitative factors focus more on safety, ethics, and environmental concerns. We will discuss further in this assignment the objectives of capital investments, how the amount of funds affects choices on capital investment decisions and what makes the cost of capital a factor in the decision-making process.
Objectives of Capital Investment
Since capital investments are invested funds within an organization to help further its business production, it is wise to say that the objectives of these investments are to increase assets, revenue, and the overall organization’s position. According to Goodman, Neamtiu, Shroff, and White (2014), “A key determinant of successful investment is management’s ability to forecast project payoffs, because forecasting plays a central role in investment methods (e.g., net present value NVP calculations, forward-looking price/earnings multiple, or other discounted cash flow analyses)” (p. 332). Some of the main important objectives in investing is obtaining a positive net value, setting priorities, purchasing assets for positive returns, and keeping debt in line just to name a few. “Net present value (NPV) expresses the sum total of an investment’s future net cash flows (receipts less payments) minus the investment’s initial costs” (“Net Present Value”, 2017). NPV helps management and possible investors see if the big picture of the investment. Priorities should be clearly set when it comes to capital investments especially when it comes to maintaining current assets or seeking additional assets. Setting priorities and purchasing assets for positive returns go hand in hand. If an organization set their priorities correctly, they will receive positive outcomes when it comes to their returns. There is no need to invest in something that does not produce positive production. Lastly, keeping debt in line is always a smart process when it comes to capital investments. Some plans that organizations create will require them to borrow money to cover the expenses. Keeping the debt within the limits that the organization sets will help toward the capital investment.