Investment in Business enterprises

INDRODUCTION

Individuals make investment in their homes, automobiles, furniture, and other long term assets. Business enterprises also make investment in long lived assets. Since capital is limited grater care should be taken while investing it. Here arises the important of capital management. By capital management we mean the planning and controlling of capital expenditure. It refers to the expenditure which incur at one point of time whereas the benefits of the expenditure are realized different point of time. It simply means investment in fixed assets and other development projects .Most firms carefully analyze the potential project in which they invest. The process of evaluating the investment is known as capital investment decision.

THE IMPOTANCE OF INVESTMENT APPERCIAL

Investment in fixed assets is concerned with high expenditure decision. The benefits or returns from such expenditure is expected to be derived over many years in future. This make investment appercial is more complex one. This decisions affect the long term flexibility of and the profitability of the organization. The success or failure the organization is depend up on the quality of investment appercial. Therefore proper planning and almost care is needed while investing .The investment appercial is so important because of the following reason

  • HUGE INVESTMENT

Investment apercial involve huge investment impermanent assets

  • LONGTERM IMPLICATION

Investment looking for long term profitability

  • IRREVRSABLE DECISION

Investment decision once made cannot be reversed back easily. This is because it is difficult to dispose of fixed assets once they have been acquired

  • RISK

Long term commitment of funds involve greater risk and uncertainty

  • GROWTH
  • IMPACT OF FIRMS COMPITIVE STRENGTH
  • MOST DIFFFICULT DECISIONS
  • COST CONTROLE
  • WEALTH MAXIMISATION
PAYBACK PERIOD

This is one of the commonly used technique of evaluating the projects. It is the length of time require to re cover the cost o the project. In short it is the period to recover the cost of the investment of the project

So we can choose project. Because the payback period is less than project A. And AP. Ltd. imposes 3year maximum also project A is more than 3year payback period

THE IMPORTANT CRITICISMS OF PAY BACK PERIOD

As like advantages this technique of evaluating the project having more disadvantages

Lets discussed on point vise

  1. The payback period neglect the time value of money
  2. This completely ignore the inflows after the payback period
  3. Sometimes a project having higher payback period better than lower payback period owing to higher return after payback period..This true incase of long term projects
  4. This method does note measure the profitability of the project. It insist the recovery of the cost of project
  5. It does not measure the rate of return
NET PRESENT VALUE METHOD

This method is used only when the rate of return on investment is pre determine the management. Under the net present value method, the present value of cash inflows is compared agonist the present value of cash out flows. The difference between the cash inflows and cash out flows are Net Present Value

These problems will understand u better

SELLECTION CRITERA OF NETPRESENT VALUE METHOD IS ACSEPT S THE HIGST NET PRESENT VALUE PROJECTS. SO THAT IN THIS CASE WE CAN SELLECT THE PROJECT 'B' IN MANEGERIAL POINT OF VIEW THIS ONE IS MORE BENIFTIAL.

LOGIC OF NET PRESENT VALUE METHOD

All major methods if calculation of pay back methods does not take the time value of money. To over come this limitations discounted payback period is suggest. In this technique .Cash flows are first converted in to their present value (by applying suitable discounting factor) and then added to assertine period of time to recover the initial out lay of the project.

INTERNAL RATE O RETURN. (IRR)

In order to find out rate of return of a project, estimated net cash inflows of each year are discounted at various rates till a rate is obtain at which the present value of cash inflow is equal to initial investment or present value come zero. Such a rate is called Internal Rate of return

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