Investment and project decisions

Company resources are scarce and there are a number of competing activities or projects. It is the role of the financial manager to make recommendations on investment decisions on usually high levels of spending that are often difficult to reverse. Most importantly, the capital investment plan needs to be a good strategic fit.

First of all, what are you going to invest in? A new product, new premises, expansion or acquisitions? Is this going to be financed through shareholders, retained earnings, leasing or Bank loans?

Is the investment going to be cost saving, income generating or both? Perform a cost / benefit analysis so that you know the required rate of return to cover your cost of capital.

Calculating the ‘payback’ gives a way of evaluating cash inflow against outflow until the net total overtakes the outlay. This is an excellent way to decide amongst competing projects – Which one gives the quickest payback?

If the project is long term, you can go one step further and calculate what the total net cash flows amount to at present day money. This is known as discounting cash flows. Also calculate margins of risk from potential changes in interest rates or inflation.

Following this approach should give a sound model for making investment or project decisions, however, beware of the non-financial aspects. There could be technical, import/export, structural or organisational behaviour issues.

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One Response to “Investment and project decisions”

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