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Capital Investment Process - Essay Example

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Capital investment always presents a serious decision for management. The commitment of funds to capital projects gives rise to a management decision problem. Capital investment appraisal theory tries to find the solution of this problem, through the development of techniques allowing to predict the outcome of every investment…
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Capital Investment Process
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Capital Investment Process

Therefore, it was always implied that despite techniques used to make the future more clear, capital investment decision requires a manager to use intuition.
This study of a Boston Mayflower - a residential social landlord with about 5,000 houses - indicates that more accent must be put on qualitative appraisal techniques. The essay begins with building a theoretical base to get the reader familiar with some basic concepts of capital investment appraisal theory. The second part of the essay is devoted to a step-by-step analysis of the investment project of Boston Mayflower.
This part of the essay is devoted to the description of methods used in the analysis of capital investment. Developed theoretical frameworks include several different techniques of analysis varying mainly in measures of investments. In other words, it is clear that the ultimate goal of every investment is maximisation of owner's wealth; however specific characteristics of every project oblige management to choose carefully and with correspondence to the most vital needs of the business.
The most typical example is the choice between long-term investment project with high return value and short-term project but with lesser return. Although the first development plan will lead to better profits in the end, sometimes a company chooses the second one. That means the time factor is more important for owners than greater profits in the illustrated case.
Generally, capital investment decisions are always connected to the following list of specific features:
a significant outlay of cash;
long-term involvement with greater risks and uncertainty because forecasts of the future are less reliable;
irreversibility of some projects due to their specialised nature, for example, plant which having been bought with a specific project in mind may have little or no scrap value; a significant time lag between commitment of resources and the receipt of benefits;
management's ability is often stretched with some projects demanding an awareness of all relevant diverse factors;
limited resources require priorities on capital expenditure;
project completion time requires adequate continuous control information as costs can be exceeded by a significant amount. (McGrath, 1998)
These characteristics make the managerial decision even more important, as it must be connected with the strategy of a company. Simply, a manager should choose not the most profit-making project, but the most suitable one for the business strategy of his/her company. This statement leads to a careful choice of the evaluation technique used to determine, which investment plan complements best the chosen strategy.
There several factors, which should be taken into consideration during evaluation of investment opportunities: initial cost of the project; phasing of the expenditure; estimated life of the investment; amount and timing of the ... Read More
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