Capital Investment And Capital Investments Essay

1284 Words May 10th, 2015 null Page
Most Companies need to invest in wealth-creating assets in order to survive in the rapidly changing global business environment (Eljelly and Abuidris, 2001). The reason being is because capital investment functions to generate cash flows in years to come and also acts to uphold the profitability of existing business activities (Watson and Head, 2007). Normally, a company will need to use up a huge amount of cash outflows at the starting point of the projects. Later they will get cash inflows on the following years. Careful evaluation on the capital investment projects needs to be done, as it requires a huge sum of cash to be raised and invested. Furthermore, it will determine if the company is profitable in the future.
Decision on capital investment should be treated seriously because it is costly in the first place. It is also costly to undo the process once it has been implemented. Simply put, capital investments have a significant impact on the future cash flows of a company. Main objective of the company is to maximise shareholder wealth, it needs to select the most profitable investment projects in order to avoid from financial loss and poor investment decisions.
Investment appraisal techniques are divided into two groups that depend on the time value of money or not. One of the groups applies the discounted cash-flow techniques: net present value (NPV), internal rate of return (IRR) and the profitability index (PI). The other groups are the non (DCF) based techniques…

Related Documents