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People aspects of capital investment decision making - Essay Example

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STRATEGIC INVESTMENT DECISIONS INTRODUCTION Primary objective of the firm is to maximize value of the firm or more defined to state would be enlightened value maximization as titled in the research of Jensen (2001). Enlightened value maximization is aimed not only to benefit the shareholders that claim only financial benefit but also to maximize value for entire stakeholders of internal and external domain…
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People aspects of capital investment decision making
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People aspects of capital investment decision making

Though these techniques have successfully gained popularity as deciding tool, however, influence from the human element on decision making still maintains its dominance (paper). Managers of the firm themselves receive impact from their traits leading to influenced preferences in making decision. Among many reasons that advocate the acceptance of human element weight in investment decision, it is also for the fact that capital budgeting techniques has some unanswered queries. For instance, subjectivity of the discount rate used to discount the cash flows. It further states that the outcome of decisions based on capital budgeting techniques does not facilitate learning function as each situation is considered different. Successes or failure of decision from the usage of these techniques are also attributed to manager; and it is a manager who receives promotion (demotion) on success (failure) of project and not the techniques. Also these techniques are not easy to employee and are considered as complex procedures. Hence, mentioned ones and many other reasons lead to advocacy to systematically include human element factor in decision making criteria (Simon (1955, 1959), Margolis (1958), and Cyert and March (1963). This report provides the critical evaluation of capital budgeting technique with application on hypothetical project of construction and discusses the impact of various factors mainly managerial implication in results. In the second part, human impact of managerial attitude towards risk is discussed in detail. THE ALTERNATIVE ‘OBJECTIVE PROCESSES’ EVALUATION The alternative objective processes evaluation has been conducted with developing hypothetical example from construction sector. Example is a construction project of three storey building. Project has an initial cost of UK ?. 75, 192 and has been financed by 60% debt and 40% equity. Table 1 provides cash flow details with application of capital budgeting techniques. Details of estimated initial cost, revenues, expenses, and loan are provided in appendix. Result of each technique application is discussed under heading titled to technique. TABLE 1: Cash Flow     No. Of Years 0 1 2 3 4 5 Working Capital ? 7,049 ? 7,593 ? 8,181 ? 8,814 ? 9,497 ? - Change in working -? 7,049 -? 545 -? 587 -? 633 -? 683 ? 9,497 Initial investment -? 75,193           Cash flow from Investing -? 75,193 ? 7,049 ? 7,593 ? 8,181 ? 8,814 ? 9,497               Revenues ? - ? 64,721 ? 69,879 ? 75,449 ? 81,464 ? 87,959 Less: Total Expenses ? - ? 35,283 ? 37,609 ? 41,305 ? 44,888 ? 49,372 Cash From Operating ? - ? 29,438 ? 32,270 ? 34,144 ? 36,576 ? 38,587               Cash Flow -? 75,193 ? 36,487 ? 39,864 ? 42,325 ? 45,390 ? 48,084 Interest Expense   ? 1,805 ? 1,471 ? 1,125 ? 765 ? 390 EBT   ? 34,682 ? 38,392 ? 41,200 ? 44,626 ? 47,694 Tax(0) ? - ? - ? - ? - ? - ? -               Total Cash Flows(after Tax) -? 75,193 ? 34,682 ? 38,392 ? 41,200 ? 44,626 ? 47,694 R   ? 0.05 ? 0.05 ? 0.05 ? 0.05 ? 0.05 DCF -? 75,193 ? 33,031 ? 34,823 ? 35,590 ? 36,714 ? 37,370 PAYBACK PERIOD   -? 42,162 -? 7,339 ? 28,251     Based on the positive NPV, the project is suggested to be feasible to undertake. Moreover, evaluation of NPV and other ... Read More
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