Investment Decisions

1. INVESTMENT
DECISIONS
Unit 3

2. OVERVIEW
 The study on financial decisions primarily revolves around
four important decisions:
 (1) Financing decisions
 (2) Investment decisions
 (3) Dividend decisions and
 (4)Working capital Management.

3. MEANING AND CONCEPT
 Investment refers to process of investing money in financial or
real assets for profit or material result.
 Investment made in buying financial instruments such as new
shares, bonds, securities, etc. is considered as a Financial
Investment.
 Investment made in plant and equipment, land and building
and other infrastructure facilities is considered as Real
Investment.
 Investment decisions refers to application of funds in long-term
assets in anticipation of future benefits and maximization of
long-term profitability.

4. MEANING AND CONCEPT
 . The following are the two aspects of investment decision.
 Returns: The prime objective of any investment activity is to earn
monetary reward, Investment decision is a vital decision in
financial management and this decisions on investment is also
purely based on the returns.
 Risk: The risk in general refers to the possibility of suffering a loss
due to occurrence of an event. The term risk is always associated
with the loss aspects since the word itself has the association of
DANGER OF LOSS.
 In the context of investment decisions risk means uncertainty in
generating profits from funds invested in long-term assets or the
risk of inability to recover back the amount invested in assets.

5. CAPITAL BUDGETING
Capital Budgeting is the process by which companies allocate
funds to various investment project designed to ensure
profitability and growth. Evaluation of such project involves
estimating their future benefits to company and comparing these
with their costs.
Thus, Capital Budgeting primarily involves making investment
decisions in capital expenditure.
Usually in business there are two types of expenditures, they are:-

6. Revenue expenditure
 Revenue expenditure is amount spent
on generating sales revenue and
maintaining a revenue generating asset.
 The benefits of this expenditure are
exhausted with a year, thus revenue
expenses are incurred for meeting day
to day expenses of carrying on a
business and have to be deducted from
the income earned by the firm.
 In other word all revenue expenses will
be taken to the profit and loss account.
Capital expenditures
 Capital expenditures is amount
spent to maintain or increase the
scope of their operations.
 The benefits from capital
expenditure to be over a period of
time greater than 1 year.
 All capital expenditures are taken
to the Balance sheet.

7. SIGNIFICANCE AND FEATURES OF
CAPITAL BUDGETING DECISIONS
Huge Funds
High Degree of Risk
Affects Future Competitive Strengths
Difficult Decision
Estimation of Large Profits
LongTerm Effect
Affects Cost Structure
Irreversible Decision