The decisions of where to invest the company's resources have a major impact on the future competitiveness of the company.
Trying to get involved in the right projects is worth an effort, both to
Project evaluation is a process used to determine whether a firm's investments are worth pursuing.
Producing new products, buying a new machine and investing in a new plant are examples of firm's investment.
Investing in those activities involves a major capital expenditure, and management needs to use capital budgeting techniques to determine which projects will yield the most return over an applicable period of time.
Capital Budgeting Factors
Factors involved in capital budgeting are:
1. Initial Cost
The initial investment or cash capital required to start a project.
2. Cash In Flow
The estimated cash amount that flows into a business due to operations of the project or business.
3. Investment Period
The duration of the project and when it is estimated to be completed.
4. Discount Factor
The value of interest that will be received or charged during the period of the project's execution and it will affect the present value of cash in flows for different years.
5. Time Value of Money
The idea that a ringgit now is worth more than a ringgit in the future, even after adjusting for inflation, because a ringgit now can earn interest or other appreciation until the time the ringgit in the future would be received.This theory has its base in the calculation for present value.
Factors influencing investment decision
A firm must make an investment decision to improve or increase the incomes of the company in order to compete in the market.
Investment environments include:
1. Product development/enhancement
2. Replacing equipment/machinery
3. Exploration of new fields or business.
Project Evaluation Methods
Common methods used in evaluating projects, investments or alternatives are:
1. Payback Period (PBP)
2. Accounting Rate of Return/Average Rate of Return (ARR)
3. Net Present Value (NPV)
4. Profitability Index (PI)
5. Internal Rate of Return (IRR)
In choosing an investment or project, select the project which generates HIGHER ARR, NPV, PI and IRR; and SHORTER PBP.
APPENDIX:
Trying to get involved in the right projects is worth an effort, both to
- avoid wasting the company's time and resources in meaningless activities, and
- to improve the chances of success.
Project evaluation is a process used to determine whether a firm's investments are worth pursuing.
Producing new products, buying a new machine and investing in a new plant are examples of firm's investment.
Investing in those activities involves a major capital expenditure, and management needs to use capital budgeting techniques to determine which projects will yield the most return over an applicable period of time.
Capital Budgeting Factors
Factors involved in capital budgeting are:
1. Initial Cost
The initial investment or cash capital required to start a project.
2. Cash In Flow
The estimated cash amount that flows into a business due to operations of the project or business.
3. Investment Period
The duration of the project and when it is estimated to be completed.
4. Discount Factor
The value of interest that will be received or charged during the period of the project's execution and it will affect the present value of cash in flows for different years.
5. Time Value of Money
The idea that a ringgit now is worth more than a ringgit in the future, even after adjusting for inflation, because a ringgit now can earn interest or other appreciation until the time the ringgit in the future would be received.This theory has its base in the calculation for present value.
Factors influencing investment decision
A firm must make an investment decision to improve or increase the incomes of the company in order to compete in the market.
Investment environments include:
1. Product development/enhancement
2. Replacing equipment/machinery
3. Exploration of new fields or business.
Project Evaluation Methods
Common methods used in evaluating projects, investments or alternatives are:
1. Payback Period (PBP)
2. Accounting Rate of Return/Average Rate of Return (ARR)
3. Net Present Value (NPV)
4. Profitability Index (PI)
5. Internal Rate of Return (IRR)
In choosing an investment or project, select the project which generates HIGHER ARR, NPV, PI and IRR; and SHORTER PBP.
APPENDIX:
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