Factors affecting investment decisions
Investment decision relates to the careful selection of assets in which funds will be invested by the firms. An investment decision regarding fixed assets is also called capital budgeting decisions. Let’s learn the factors affecting investment decisions or capital budgeting decisions.
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Cash flow of the project
When a company takes an investment decision involving a huge amount, it expects to generate some cash flows over a period. These cash flows are in the form of a series of cash receipts and payments over the life of an investment. The amount of these cash flows should be carefully analyzed before considering a capital budgeting decision.
Rate of returns
The most important criteria are the rate of return of the project. These calculations are based on the expected returns from each proposal of assessment of the risk involved. Suppose, there are 2 projects A and B, with the same risk involved and the rate of return of 10% and 12% respectively. Then, under normal circumstances project B should be selected.
Investment criteria involved
The decision to invest in a particular project involved a number of calculations regarding the amount of investment, interest rate, cash flows, and rate of return.
Trick to remember the factors affecting investment decisions, use acronym RIC
R – Rate of return
I – Investment criteria
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