What factors influence on Capittal Investment Decision.

Factors that influence Capital Investment Decisions

INTRODUCTION

Capital investment decisions are critical . It involves large sums of money . The company must use the different capital investment decision tools in to forecast whether the company will benefit from investing in buying high value factory equipments . Some of the tools like payback period , cost -benefit analysis , competitors , government regulations are only some of the factors that influence capital investment decisions (Dayananda et al . 2002 , 6 . The following paragraphs explain in detail the different factors that influence capital investment decisions

BODY p

There are many factors that influence capital investment decisions First , the net present value is a valuable tool for determining whether to purchase new manufacturing equipment that entails large cash outlays And , the payback period is influential on capital investment decisions In addition , another factor that influences capital investment decisions is government regulation . Further , valid and relevant information is another factor that influences capital investment decisions . Also , the competitor is a good factor in capital investment decisions . And , the ability to pay is a good factor in capital investment decisions . Plus improving the working conditions of the factory would be a very good factor in capital investment decision . Further , replacement of worthless factory equipment is a good factor for capital investment decision Finally , Analysis of the cost and the benefit derived from the capital investment is a must (Mcmenamin 1999 , 169

First , the net present value is a valuable tool for determining whether to purchase new manufacturing equipment that entails large cash outlays . The company uses this tool in to determine whether the present value of the huge capital investment . Next , the discounted cash flow approach known as accounting rate of return is another tool to determine if a large capital investment would be a good decision . Evidently , the net present value is a valuable tool for determining whether to purchase new manufacturing equipment that entails large cash outlays is positive (Dayananda et al . 2002 , 23

And , the payback period is influential on capital investment decisions . This tool helps the investors to determine which capital investment project would allow the company to recover their investment in the earliest possible time . Many investors prefer investing in projects where they could recover their investments in the earliest possible time if all other factors are evenly . For example , Alternative A capital investment decision would generate cash inflows of 200 ,000 a year would result to ten year payback period of factory equipment that costs only 2 ,000 ,000 . Alternative B capital investment decision would generate cash inflows of 400 ,000 would result to the five year payback period of factory equipment that also costs 2 ,000 ,000 . Here , applying Alternative B is the better capital investment decision to make . Surely the payback period is influential on capital investment decisions (Flynn 2001 , 14

In addition , another factor that influences capital investment decisions is government regulation . For example , the company must comply with new government regulations require that the current factory equipment must comply with...