Making capital investment decisions

Full Answer Section Financial analysis tools There are a number of financial analysis tools that can be used to convince management to make a capital investment. These tools include:

• Net present value (NPV): NPV is a measure of the total present value of the cash flows generated by an investment. A positive NPV indicates that the investment is expected to be profitable.
• Internal rate of return (IRR): IRR is the rate of return that an investment is expected to generate. An IRR that is greater than the organization's cost of capital indicates that the investment is expected to be profitable.
• Payback period: Payback period is the amount of time it takes for an investment to generate enough cash flow to recover the initial investment. A shorter payback period indicates that the investment is expected to be more profitable.

Non-financial factors In addition to financial factors, managers may also consider a number of non-financial factors when making capital investment decisions. These factors include:

• Strategic fit: The investment should fit with the organization's overall strategy.
• Risk: The investment should be considered within the context of the organization's overall risk appetite.
• Environmental impact: The investment should consider the environmental impact of the project.
• Social impact: The investment should consider the social impact of the project.

Conclusion Capital investment decisions are complex and involve a number of factors. By carefully considering the financial and non-financial factors involved, managers can make informed decisions that will help their organization achieve its goals. In the example I provided, the financial analysis tools of NPV and IRR could be used to convince management to make the investment in new equipment. The NPV would show the total present value of the cash flows generated by the investment, and the IRR would show the rate of return that the investment is expected to generate. If both of these metrics are positive, then the investment would be considered to be profitable. In addition to the financial factors, managers would also need to consider the non-financial factors of strategic fit, risk, environmental impact, and social impact. The investment should fit with the organization's overall strategy, and it should be considered within the context of the organization's overall risk appetite. The environmental and social impact of the investment should also be considered. By carefully considering all of these factors, managers can make informed decisions that will help their organization achieve its goals.

Sample Answer Example of a possible capital investment One possible capital investment that could be made to improve productivity in a department is the purchase of new equipment. For example, a manufacturing department could purchase new machinery that would allow them to produce products more efficiently. Or, an office department could purchase new computers and software that would allow them to work more effectively. Level of management involved in making capital investment decisions The level of management involved in making capital investment decisions will vary depending on the size and complexity of the organization. In a small organization, the decision may be made by the CEO or another senior executive. In a larger organization, the decision may be made by a committee of managers or by a board of directors.