capital investment

Making appropriate investment decisions

Making appropriate investment decisions that will help the firm prosper is the most difficult stage in capital investment. Proper capital investment decisions must be made during the development of a project for the project to succeed. It will be difficult to begin a particular investment without first considering crucial strategies that will supply future predictions and predicted project profitability. In this article, I will take a close look at the many investment opportunities and emphasize suggestions for the best strategy that I used to complete a successful project. To effectively evaluate capital investment proposal, I first had to look at various methods available for any organization or an individual can choose from. These methods usually give guidelines and proper anticipation about the possible future outlay of the project. The methods have been discussed below:

Urgency method

One the key method that I found appropriate to evaluate investment proposal is the urgency method. In this method, urgent issues such as machine breakout that occurs in the process of service delivery would require replacement without looking at future benefits and current costs (Ederer 1040). The key concern will be to ensure the system turns back to its normal operation. This method is essential in formulating investment decisions because it determines the efficiency of the system.

Pay-Back Period Method

I applied this method in determining the period in which the capital expenditure employed is expected to pay itself. It is important in explaining the terms of the period as well as the existing relationship between cash inflows and the investment employed.

The financial statement method

This method considers the rate of return based on the values of income and the projected investment determined by accounting concepts.

Net present value method

This is the best method of evaluating investment proposals. The net present value is the difference between the total present value of anticipated cash inflows and outflows. It gives the anticipated profits that the investment is anticipated to obtain over a given period. The NPV method is usually preferred because of its ability to effectively undertake different projects without failing to provide proper future outlay. In fact, every firm opts to know and understand their future life and capital investment. This is key in making proper current investment decisions.

Internal rate of return method

This method usually measures the rate of returns that the investment is expected to yield over time. It is a commonly used method that measures key aspects of the investment prospects. Precisely, it is the maximum interest rate that could be paid in the capital used during the life of capital investment projected without realizing any loss.

Terminal value method

In this method, the savings of a given year is invested in another different project at a given rate of return from the first time it is received to the moment the project lifespan ends. The cash inflows are usually reinvested in other developments once they have been received. This is a key process that aims at generating more profits.

Benefit-cost ratio method

This method is more like the net present value technique but is based upon time adjustment. It is obtained through division of the present value of the outlined benefit by the given present value of the cost. The ratio obtained between the two would give the benefit-cost ratio (Whittaker et al., 39).

Selecting Appropriate Methods

Before opting for the best method to use, I had to critically look at various factors that helps in the entire reevaluation process. The methods I selected was able to outline the key factors and considerations that the project will adopt in the course of its execution. The most preferred method of capital investment evaluation that I applied was the net present value method and the internal rate of return. Typically, I opted for this methods since they have been used to undertake a lot of capital investment projects.

Reasons for Opting for above Methods

In undertaking my restaurant business, I preferred the net present value method because of its ability to be used easily. Also, this method gives the present value of the future investment making the firm to understand the financial outlay of future investments (Shivam n.p). It speeds up the investment decisions from the manner in which they undertake various decisions and outline proper considerations that help in undertaking the given investment. On the other hand, I also had to use the internal rate of return method as it outlines the rate of return that the enterprise will attain over a given period in its capital investment projects. This method calculates the rate of returns in a given period and gives a proper outlay that facilitates the entire process. This is a significant method that has been used considerably to execute different projects.

Conclusion

In summary, any project that ought to be undertaken spans through making suitable capital investment decisions. With the different methods used, there can be a suitable way to know and evaluate the most suitable method which will outline the right path to making a significant investment. Through my restaurant outlet, I was able to learn a lot of significant prospects that are necessary in effective decision making. It is a requirement that all capital investments pass through the lens of analysis and evaluation to ensure that they are properly following the given proponents that will help in the entire project execution.

Works Cited

Ederer, Nikolaus. “Evaluating capital and operating cost efficiency of offshore wind farms: A DEA approach.” Renewable and sustainable energy reviews 42 (2015): pp. 1034-1046.

Shivam, N. “Evaluation of Investment Proposals: 7 Methods.” Economics Discussion, 2017, N.p., http://www.economicsdiscussion.net/capital-budgeting/evaluation-of-investment-proposals-7-methods/21962.

Whittaker, Jean, Humphrey Maine, and Caroline Wilkinson. “Evaluating Capital Investments.” Management Research News 13.3/4 (1990): pp. 38-40.