essay about investment decision

Investment Decisions in Corporations Essay

In order to succeed in a competitive market, corporations need to pay much attention to their investment decisions to gain benefits and profits. The process of making effective decisions involves several steps, and it needs to be discussed in detail along with a list of options that are available to corporations for their investment (Trang & Tho, 2017). The purpose of this paper is to provide an explanation of how the majority of corporations make specific investment decisions to add to their profitability and competitive advantage.

The first step in the decision-making process related to investing in the analysis of a current situation with the help of certain tools, such as the cash flow analysis and the analysis of the cost of capital. These tools are important to indicate the current position of a corporation in the market, evaluate its attractiveness to potential investors, and influence its own investing decisions (Goodman, Neamtiu, Shroff, & White, 2013). The second step in the decision-making process is the identification of available options or perspectives in order to improve the discussed situation (Hori & Osano, 2014). Thus, financial managers and members of strategic teams in corporations focus on determining areas to invest in and increase capital.

These areas and options include possibilities for investing in their own business through purchasing assets, resources, and technologies and improving processes in order to make operations cost-efficient, as well as to make their products and services innovative. At this stage, managers in corporations choose the most appropriate assets and resources to invest in, and they plan to receive more revenues because of expansion activities, increased sales, and improved quality (Shroff, Verdi, & Yu, 2013). This approach is actively used by corporations when they do not focus on mergers and acquisitions as part of their strategy.

Another option to choose is the possibility to invest in other businesses, including suppliers, smaller companies, and start-up companies with a high potential for further growth. For example, large corporations often use their venture capital funds in order to invest in firms in the technology industry and receive financial gains in the future (Hori & Osano, 2014). This strategy allows corporations to expand their operations and enter new attractive and actively developing markets because these investment decisions are based on proper evaluations of the latest market trends, as well as on forecasts for the future.

One more option is associated with the investment in foreign industries and markets. Corporations usually choose to expand their activities in many foreign countries because of cost-efficient resources, low taxes, and attractive gains (Ding & Qian, 2014). The decision regarding opening foreign subsidiaries and investing in suppliers from foreign markets depends on the analysis of external environments that influence the development of the industry and competition in the selected country (Shroff et al., 2013). This type of investment decision is associated with investing in stocks, which often results in improving companies’ positions in the market (Ahmad & Anees, 2016). Moreover, corporations can also invest in hedge funds in order to increase their return on assets and improve the currently followed capital distribution strategy.

The third step that corporations should complete in order to make an investment decision is the assessment of options and their advantages and disadvantages. At this stage, managers concentrate on forecasting future cash flows with reference to their investments and the analysis of net present value (Trang & Tho, 2017). As a result of the conducted assessment, financial and strategic development managers in corporations choose those specific options and projects to invest in that are most attractive and potentially profitable for them.

From this point, to make effective investment decisions, it is important to evaluate projects or options for investing in relation to each other in order to receive a full picture regarding forecasted profits. After that, managers and financial experts prioritize options for investment depending on the analysis results. From this perspective, those managers who have developed skills in making financial forecasts and analysis to support investment can potentially make more efficient investing decisions (Goodman et al., 2013).

However, researchers also state that corporations should pay more attention to their investment decisions and the need for investing in order to avoid the problem of overinvestment that is typical of large companies rather than small private firms (Shroff et al., 2013). Thus, investing decisions of corporations are influenced by the fact that managers are often oriented to increasing companies’ investment levels.

The analysis of the scholarly literature on the problem indicates that managers in corporations follow a certain process in order to evaluate investment projects and options. Companies can choose from investing in their own business operations, in their suppliers and other companies in the market to receive a share, in foreign companies, in opening subsidiaries, in purchasing stocks, and in hedge funds. All these options are appropriate for different types of corporations, various environments, and specific market situations. Therefore, in order to make a proper investment decision, corporations concentrate on conducting detailed financial analyses that help them evaluate alternatives and choose the most attractive path for investment.

Ahmad, B., & Anees, M. (2016). Investment decisions stock buybacks or stock prices? Journal of Business Strategies , 10 (2), 51-68.

Ding, Y., & Qian, X. (2014). Investment cash flow sensitivity and effect of managers’ ownership: Difference between central owned and private owned companies in China. International Journal of Economics and Financial Issues , 4 (3), 449-456.

Goodman, T. H., Neamtiu, M., Shroff, N., & White, H. D. (2013). Management forecast quality and capital investment decisions. The Accounting Review , 89 (1), 331-365.

Hori, K., & Osano, H. (2014). Investment timing decisions of managers under endogenous contracts. Journal of Corporate Finance , 29 , 607-627.

Shroff, N., Verdi, R. S., & Yu, G. (2013). Information environment and the investment decisions of multinational corporations. The Accounting Review , 89 (2), 759-790.

Trang, P. T. M., & Tho, N. H. (2017). Perceived risk, investment performance and intentions in emerging stock markets. International Journal of Economics and Financial Issues , 7 (1), 269-278.

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Essay: Investment Decisions

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Investment Decisions

Investment projects are a big and an important part of Romania’s economy. Through this thesis we can find out more about the profitability of an investment, more specifically, in the case study I chose a project from the oilfield area, where I’m trying to find out the impact of having the biggest mud plant from the country, built after German standards. Investment notion defines a complex and very controversial financial category. At a first look, investment appears just as a growth in the company’s initially heritage: industrial and civil construction, acquisition, assembly and installation of industrial equipment, purchase of machinery, etc.. At a second look and a deeper analysis, investment is capital allocation with a profitable purpose that will increase the amount of capital used. Investment decisions typically involve the commitment of large sums of money, and they will affect the business over a number of years. Furthermore, the funds to purchase a capital item must be paid out immediately, whereas the income or benefits accrue over time. (Michael Boehlje and Cole Ehmke, Capital Investment Analysis and Project Assessment) It is mandatory for management to become very circumspect about allocating limited resources among competing opportunities. The critical decision of allocating resources for a project is known as capital budgeting. The ability to make such a critical capital allocation decision requires a proper estimate of the worth of each opportunity concerning the projects which is a function of size, timing and predictability of future cash flows. Most academicians state that effective cost allocation for an investment project can best be achieved with a sophisticated capital investment process. They assume that a sophisticated process increases the probability of making relevant investments by ensuring that corporate strategy will be followed, that all investment opportunities will be considered appropriately and consistently, and that the counterproductive political aspect of informal decision making will be minimized. Because investment decisions rank among the most critical types of managerial decisions made in a company and can have major long-term implications, both positive and negative, for the success of a company, managers must understand how financial investment decisions are made if they are to participate in improving corporate performance. Ultimate part of the research on financial investment analysis has been conducted by financial scholars who have developed project evaluation techniques. Though, there is a management literature that takes a process approach to the subject and places financial evaluation in the context of a complex organizational decision process. The rest of this paper is organized as follows. In the first section I present in detail the project evaluation process and the main investment criteria, from both financial and non-financial analysis. In section two, I present a detailed analysis of the data, through the case study and discuss othe results both on their own and in the context of existing literature. I placed most of the tables, which summarise the financial analysis calculations, at the end of the paper (Appendix) due to their large extension. Finally, in the last section I present my conclusions and advises for this investment project.

2. Project Evaluation ‘ Investment Criteria

Effective investment decision making is essential to corporate survival and long-term success. These decisions help to mould company’s future opportunities and develop competitive advantage by influencing, among other things, its technology, its processes, its working practices and its profitability. Completing a thorough investment analysis may seem complicated and difficult. But the reward of a soundly based decision will be worth the effort invested to learn the process and collect the necessary information. (Michael Boehlje and Cole Ehmke, Capital Investment Analysis and Project Assessment)

There are several important features for an investment decision making to be effective (Boquist et al. (1998), Adams et al. (2004), apud ‘.): ‘ It is dynamic, not static. It explicitly recognizes that the quality of information can be improved over time. Thus capital budgeting should be a sequential, multiple decision process that integrates the information needed to obtain cash flow estimates into the financial analysis of the cash flows. ‘ It is linked to the strategy implementation in relation to the company’s multiple stakeholders. Therefore, project proposals should be supported by relevant non-financial data and forecasts. ‘ It recognizes the options inherent in value-enhancing capital budgeting. ‘ It takes a cross-functional approach. The quality of estimates of expected cash flows and the uncertainty in cash flows are critical. Since the underlying information for these estimates comes from many functions within the company, those providing information must see themselves as strategic partners in the process. The investment decision rules may be referred to as capital budgeting techniques, or investment criteria. A sound appraisal technique should be used to measure the economic worth of an investment project. The essential property of a sound technique is that is should maximize the shareholders wealth. The following other characteristics should also be possessed by a sound investment evaluation criterion: ‘ It should consider all cash flows to determine the true profitability of then project. ‘ It should provide for an objective and unambiguous way of separate good projects from bad projects. ‘ It should help ranking of projects according to their true profitability. ‘ It should recognize the fact that bigger cash flows are preferable to smaller ones and early cash flows are preferable to later ones. ‘ It should help to choose among mutually exclusive projects that project which maximizes the shareholders wealth. ‘ It should be a criterion which is applicable to any conceivable investment project independent of others. The importance of investment decisions has lately even increased. There is a short of available funds in the current world economy due to the financial crisis, and thus all the investments and capital allocations must be directed to profitable projects. In times of uncertainty, companies also seek ways to expand their operations to new areas of business, whether the expansion is geographical or operational. In these types of situations, strategic and long-term aspects become more important than short-term profit. On the other hand, the pressure to comply with the financial targets set to the management is playing key role in some organisations’ strategic investment decisions (SID’s). Investment decisions, and also strategic investment decisions, have been studied in the light of utilized capital budgeting techniques quite thoroughly in the current literature (e.g. Alkaraan and Northcott, 2006; Arnold and Hatzapoulos, 2000; Farragher et al., 1999; Graham and Harvey, 2001; Pike, 1996; Sandahl and Sj??gren, 2003; Liljeblom and Vaihekoski, 2004). These studies have concentrated on the techniques that are used and not that much on how they are used and what contextual setting affect to the use of appropriate techniques. Research evidence also indicates that organisations weight strategic and financial aspects quite differently (e.g. Carr and Tomkins, 1996, 1998). Also differences between different countries (compare e.g. Graham and Harvey, 2001; Sandahl and Sj??gren, 2003; Brounen, De Jong & Koedijk, 2004) and small versus large corporations (Graham and Harvey, 2001; Pike, 1996) have been observed. The caveat, however, has been that no studies have sought to create systematic approach to explain the above mentioned differences in applied capital budgeting techniques of organizations. 2.1 Financial analysis

Projects of investment character can be in term of quantitative outputs characterized by three basic factors, mainly by cash flows, or by the difference between receipts and expenditures resulting from the investment, by the real service life and by the risk, that is run by implementation of the investment and for which the enterprise should require an adequate return. There are many methods or criterions for evaluating capital projects that approach to these basic factors in different ways. Criterions of evaluating projects from a financial analysis point of view can be divided into two groups ‘ static and dynamic criterions. Static criterions consider mainly cash flows. They consider time in constraint mode and in principle they do not work with risk. They include e.g. total investment income, net total investment income, annual average returnability, average payback period, payback period. Dynamic criterions take into account all three factors which mean cash flows, service life and undergone risk as well. They involve e.g. Net Present Value (NPV), Internal rate of return (IRR), Profitability index (PI), Discounted Payback period (PP). During the evaluation of investments, other instruments are being used, mainly in connection with integration of the risk and uncertainty into this process of evaluation. They include above all sensitivity analysis, scenarios and simulation techniques. Evaluation of flexible investment projects is enabled by real options. Choice of a criteria for evaluating investments from a financial point of view reflects more aspects, mainly preferences of the decision-maker (impact on relative or absolute profitability, stress on short Payback Period, existence of the budget constraint). Although the financial area covers many ways to evaluate a project, most of the companies consider the most important net present value, after it the internal rate of return (IRR) as beeing a relevant decision criteria as well. They also prefer to use scenario analysis, payback period and benefit/cost ratio. The least relevant financial techniques are real options, accounting rate of return, break-even point and simulation risk (Graham and Harvey, 2001 study).

2.2 Is financial analysis enough?

Recent literature has been emphasising the need to take both financial and nonfinancial aspects into consideration when considering capital budgeting decisions. This is to be done since the early stages of project appraisal, and not only when risks become reality. We wanted to know to what extent portuguese companies are aware of the importance of non financial aspects at their project appraisal processes, and, in their practices, what exactly they are doing and considering as more or less important. There are several traditional methods used by analysts for evaluating a project’s viability. These include the net present value, internal rate of return, payback method and others. However, none of these investment assessment tools for capital budgeting takes into consideration the uncertainty of variables that may occur in the future. While, the traditional methods of analyzing projects are widely accepted, they neglect management’s ability and flexibility to respond to uncertainties that are likely to affect their projects. The traditional methods typically assume a single line of development for a project and simply incorporate the probability of failure into the overall expected value for the project. The probability of failure is carried as a discount rate that in itself is a very hard value to assign. The decision-making process for investments is complex and goes beyond the financial aspects. Skitmore et al. (1989) point out that ‘any knowledge that can help the decisionmakers(…) to recognize and minimize the uncertainty and risk is expected to have somepotential value’. Many of the project’s goals tend to be qualitative and not easily measurable, apart from being long term goals and not immediately verifiable. Andreou et al. (1989) note that a project generates externalities, in terms of costs and benefits that are not taken into account in financial forecasts. The financial techniques must be used only as a guide, or a baseline, and other factors that may influence the uncertainty analysis must be considered. The financial evaluation is only a part of the decisionmaking process and additional information is needed. Therefore, even if the financial conditions are extremely favorable, neglecting some of the qualitative aspects may cause serious problems. The capital budgeting process must enclose a wide spectrum of analysis dimensions, whether financial or not, as a way to fully study all the aspects that may influence its viability. 2.3 Non-financial analysis

Myers (1984, a, p. 131) refers that ‘the non-financial approach taken in many strategic analyses may be an attempt to overcome the short horizons and arbitrariness of financial analysis as it is often misapplied’. Non-financial factors can influence the investment decision in that it can influence the viability and success, as well as affect the financial analysis through the cash flows and the discount rate of the project. The problem is that there are many non-financial aspects that are not easily translated into monetary terms, because some factors are difficult to estimate and can produce evaluation errors easily. The difficulty in evaluating these aspects is related to their intangible nature and measurement problems, which make this analysis highly subjective. Mohanty et al (2005, p. 5199) refer that qualitative attributes are ‘often accompanied by certain ambiguities and vagueness because of the dissimilar perceptions of organizational goals among pluralistic stakeholders, bureaucracy and the functional specialization of organizational members’. This might be one of the reasons why the practice of firms still has a long way to go. Mohamed and McCowan (2001, p. 232) consider that the ‘lack of know-how in measuring strategic and intangible (qualitative) costs and benefits led current models to ignore their contribution to the overall economic analysis’. In this way, Lopes and Flavell (1998) recognize that a ‘major reason why non-financial and non-technical aspects are not considered more fully during project appraisal is probably the lack of an analytic framework that would highlight the importance of those aspects and would provide guidelines on how to incorporate them into the appraisal’. Therefore factors like: commercial, political, social, environmental, organizational, human resources and project manager, should also be taken into consideration when you evaluate a project. ‘ The human resource factor: Large companies place more importance, relatively to small companies, on interpersonal relationships, the ability to work as a team, joining people with complementary skills, problem-solving ability, the level of unionized workers, attribution of autonomy, authority and responsibility, incentives to team spirit and collective decision-making. In expansion projects, compared to other types, less importance is attributed to the ability to evaluate risks, joining people with complementary skills, trust between team members, incentives to team spirit and collective decision-making. In long term projects greater importance is attributed to the ability to evaluate risks, the ability to work for common goals and trust between team members, and less importance is attributed to external recruiting. Note also that internal recruiting tends to be more important in companies where the CEO’s tenure is short, and when the project manager is also on the board/administration. We also see that when CEO’s tenure is short, when the project manager is young, and when the decision is made by someone who is not on the administration, the perspectives of future Large companies place more importance, relatively to small companies, on interpersonal relationships, the ability to work as a team, joining people with complementary skills, problem-solving ability, the level of unionized workers, attribution of autonomy, authority and responsibility, incentives to team spirit and collective decision-making. In expansion projects, compared to other types, less importance is attributed to the ability to evaluate risks, joining people with complementary skills, trust between team members, incentives to team spirit and collective decision-making. In long term projects greater importance is attributed to the ability to evaluate risks, the ability to work for common goals and trust between team members, and less importance is attributed to external recruiting.

‘ Project Manager Analysis

The choice of a Project Manager (PM) being the leader of the project needs special attention. The role of the project manager is mainly related with understanding the business’s environment and delegating and attributing responsibilities. As for the attributes identified as needed: management skill, decision-making skill and leadership skill stand out as the most important ‘ as in Shenhar et al. (1997), Turner and Muller (2003, 2005), Pozner (1987), Pettersen (1991) and Thoms and Pinto (1999). On the other hand, in short term projects, the appropriate exercise of authority and the manager’s creativity are more important than in longer term projects. In small projects the project manager’s success within the organisation, ambition and energy are more important and the management skill is less important than in larger projects. Lastly, in those projects viewed as least successful manager’s technical and motivational skills are more important than in more successful projects. ‘ Economic Uncertainty Market variables such as the price of oil and gas, interest rate, and currency exchange rate are economic uncertainties that greatly affect the viability of a project. Another important factor is that the state of the targeted market economy that is where the commodities are intended to be sold is always an uncertain factor. An important question to be asked is whether consumers have the purchasing power to be able to buy the commodity. These economic factors are very volatile and correlate with the general movement of the economy. Uncertainty can be favorable when the price of oil and gas increases and the corresponding increase in purchasing power generates higher cash inflow. ‘ Political Uncertainty Investors deciding to undertake a foreign investment need to consider political uncertainty and the likelihood of affecting their business. Firms encounter political uncertainty and complexity especially in the developing countries. These uncertainties and complexities are risks that range across economic, financial, legal and social conditions of the foreign country. In general risk from political uncertainty can be grouped onto two categories. First, there are risks that may not be directly caused by the government such as war, uprising of certain group, or other forms of violence. Second, there are risks that are caused through government policies, for example export and import restrictions, tariffs and taxes, price control, expropriation, devaluation of currency and other foreign exchange control. Political risks stem from government policies which are exhibited through the national economy and social structures within the country. The host government tends to create risk for the affecting firm that can be manifested through its policies, laws, regulations and administrative pronouncements. They impose implicit transfer risk to firms in their country in many ways. It is sometimes evident when the government restricts the firm from sending remittance of earning or repatriation of profits to the parent firm. Another political risk that can affect foreign firms is operational risk. It is seen when government require the majority of employees to be hired for the operation from the country (or local area), but there may not be enough skilled workers as needed by the firm. Government policies at times pose serious problems to the firm when it is made to go through difficult work permit procedures for employing competent worker who do not come from the operating country. The worst among the numerous risks is expropriation by government, in which government takes control of the firm by force and pays little compensation or nothing at all to the original owners of the firm. The act is usually exhibited by military takeovers in destabilized countries. It is an unacceptable behavior but may be encountered. Governments can sometimes pass laws to prevent proven oil and gas reserves and resources from being explored and produced due to environmental threats to the country, even when a firm has already acquired a lease for its operations. For example, the U.S Congress has enacted moratoriums on drilling and exploration in areas along the coasts of some states. These policies are intended to protect coastlines from even unintentional oil spills, although the Mineral Management Service estimates that there is an approximate 76 billion barrels of oil in the undiscovered fields offshore in the U.S. outer continental shelf (Jarmon & Anderson, 2007). However, government actions can also be affirmative and can have a positive impact on a project. The positive steps a government takes to aid companies can be seen in term of tax exemptions for some number of years, or tax reductions which decrease the cash out flows of the firm which may result a corresponding increase in profit. 3. Case Study: M-I SWACO Romania

3.1 Company presentation

With over 13,000 employees in more than 75 countries around the world, M-I SWACO is a vital part of the world’s hydrocarbon exploration and production industry. The company is the leading supplier of drilling fluid systems engineered to improve drilling performance by anticipating fluids-related problems, fluid systems and specialty tools designed to optimize wellbore productivity, production technology solutions to maximize production rates, and environmental solutions that safely manage waste volumes generated in both drilling and production operations. In August 2010, M-I SWACO became part of Schlumberger through its merger with Smith International. The primary driver behind this merger is drilling optimization. In order to sustain and increase world oil and gas production, higher levels of drilling will be necessary in increasingly challenging and complex environments. This means wells with longer and more complex profiles. Understanding the technical challenges and mitigating the consequent risk in advance of a drilling program can mean major cost savings and well performance improvement for our customers. M-I SWACO will play a critical part in meeting these challenges. From its earliest roots, M-I SWACO recognized that it best served its clients, not by delivering drilling fluid products to the client’s location, but by anticipating and planning for how those products would behave in the downhole environment, both to optimize drilling performance and to minimize the risk associated with fluids-related problems.

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Home Essay Examples Finance

The Investment Decision-making Process

• Category Finance

The making of investment decisions is critical for businesses, as they represent a way of achieving the organization’s goals and objectives. Potential investment opportunities to make sure that decisions reflect the requirements of the business and its financial management strategy include Mutual funds/exchange-traded funds, foreign currency exchange, Stocks and Shares, Bonds, land, Certificates of deposit.

In an open-end fund, monies are pooled from many investors to shop for securities. this is often a professionally managed investment fund. Capital investment usually includes significant cash flows for the organization; both in and outflows. this sort of investment is generally wont to finance the procurement of asset/s necessary to start out a venture.

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Investment decision-making techniques are helpful in guiding financial managers in making appropriate business decisions. These techniques include payback which is the time taken for an initial investment to be recovered out of net cash flows. The accounting rate of return relies on identifying the profitability of the investment over its life. Net present value (NPV) – considers all costs and therefore the revenues of a project and it gives an easy decision rule which states that, if the NPV of a possible investment is positive then accept the project, if it’s negative then reject the project. a part of the role of the financial manager is to make sure that finance is used effectively and efficiently to form sure the organization’s objectives are attained. this is able to encompass investment appraisal, which considers the long-term plans of the organization and makes sure that the proper projects are adopted/invested in. Secondly, the matter of capital management. this is often concerned with the management of liquidity, confirm debts are collected which cash balances are appropriately invested among others.

The investment decision-making process involves key steps; determine the supply of finance, identify profitable opportunities, refine and classify proposed projects, evaluate the proposed projects, approve the projects, and therefore the monitoring and control of projects. Some investment appraisal techniques seek to mirror the value of cash. The (WACC) is often wont to decide the value of capital, it is often used because of the discount rate.

Investment evaluation methods include discounted income analysis, this makes it easy to match the returns you expect from an investment with its initial cost. an identical tool, the interior rate of return, allows you to match expected returns together with your costs of funding. The more straightforward measurement of the payback period tells you ways long it might fancy recovering your investment. The organization may evaluate the feasibility of investment proposals on the idea of capital budgeting techniques as per financial perspective. Major investments to drive improvements need careful evaluation to make sure that the potential financial and business impact is known. The strategic financial management process involves continuous monitoring, and planning and is typically focused on long-term profit. A competitive analysis should be done to make sure that the business needs are reflected alongside financial strategy while evaluating the investment opportunities. Investment opportunities should be evaluated to support the risk-return of investments and must match the organization’s risk appetite and anticipated return on the invested amount.

NCB Capital Markets provides clients with a good range of opportunities in investment. The team provides government agencies and medium to large corporate entities with tailored financial solutions to suit their varying principal needs. The bank provides advisory services and structures and executes an honest range of complex domestic and regional transactions including acquisitions, divestitures, mergers, and company restructurings. NCB recently invested heavily in the acquisition of the Guardian Insurance Group. The bank also invests in: Bonds – Global bonds, Government of Jamaica Securities, Structured notes. Also, market securities – Treasury bills, CDs, Repurchase Agreements, and Stock brokerage services. NCB launched an IPO within the land environment recently which facilitated the diaspora; they were ready to access this IPO through the GoIPO portal.

In the past year, NCB invested within the exchange needs for patrons and recorded a turnover of roughly US$5Billion. Partnership with Guardian group has strengthened NCB’s position within the insurance segment. The Bay west location was recently renovated to satisfy the requirements of consumers and staff more comfortably, a move to assist to understand operational efficiencies.

Non-financial factors and their importance within the making of investment decisions include employees; one among the first stakeholders, they’re the driver of the organization and it’s critical for them to be involved within the deciding process. 

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Essay on Investment | Need & Importance

March 19, 2018 by Study Mentor Leave a Comment

Investment is to distribute money or time in the present with a hope of deriving some benefit in the future. Investment has many meaning and can be looked upon through different angles and sides.

The two major and important characteristics of an investment are present offering and future benefit.

For instance, investment in bonds, real states, valuable objects, insurance policies, etc. All these activities involve current sacrifice of consumption for a profit or gain in future.

When we make our investment for a long period of time by confining our needs for the sake of benefits in the future, risks and the expected benefits and return on the invested or the allocated amount is uncertain.

Therefore, the risk and the expected return from the investment are the two concerning factors of the entire investment process.

Table of Contents

Need to invest

We invest to improve and to upgrade our future stability. No one is aware of what fate is stored for them. Investment ensures betterment and protection of one’s life during the peculiar days.

What we invest comes from assets that we own, saved money, etc. By investing the savings today we build and enhance our future needs and dreams.

It may happen that today what we have might not be present with us tomorrow. We have seen many cases that many people leave abandon their parents when they grow up or after marriage, thus to face such situations people invest their savings so that they don’t need to be dependent on others in future.

Investment bears the fruit especially after the ‘Retirement’, when one retires from his/her job the invested amount serves acts like a pillar for their old age, it motivates and uplifts us to live and enjoy life to the fullest without any worries.

Investment should not be made an option but it is a necessity, a need and one should manage their wealth effectively to derive most from it in the future or in the hour of need.

How to invest

We invest because we have goals in our life, and it may be buying a home or saving for child’s education, for medical uncertainties.

For a successful execution, planning provide a good start and meaning to our financial decisions.

It helps us to understand how each and every decision affects and influences other areas of family requirement. It gives a feeling of security and satisfaction that our dreams, goals and life are at a good track.

Investment process

Investment is needed to be carried out effectively and efficiently.

It is like a ladder on which we need to take slow and steady steps after thinking and observing all the conditions carefully.  Before making any investment we should bear in mind the risk and the return relationship associated with it.

We should be determining about the investment objectives and policy security analysis is needed to be carried out. Construction and diversification of the portfolios and evaluation of performance is needed to be reviewed.

Factors influencing investment

Returns, capital appreciation, safety and security of the invested funds play an important role in the selection of investment.

Investment can be done in the various areas but only after analysing those particular areas that what profit or loss can be faced in future.

It can be made in the form of equity, preference shares, real states, money market investments, non-marketable assets   , valuable goods, insurance policy, etc.

Types of investment

Investment can be of many varieties.

Types of investment include alternative and traditional investments.  One can choose according to his will the type under which he/she wishes to invest.

Alternative investment is an investment in tangible assets, real estates, commodities, private equities. Traditional investment is the one associated with the bonds, cash and policies.

These all depends of the investment environment. The decisions to buy/sell properties are taken by individuals, or group of people needs to carry out the processes.

There is a money and capital market where the investor invests according to their needs. The investment can be for a short period of time that is called a short term investment or for a longer period of time called long term investment.

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Investment Decision: Poland vs. Greece

Introduction.

Incisive investment decisions focus on understanding risks and rewards in a global landscape shaped by economic intricacies (Maris, 2022). As the CEO entrusted with choosing between a £100 million investment in Poland and Greece, this analysis explores the distinctive risk profiles of each nation. Despite comparable long-term returns, our decision’s core lies in navigating each country’s unique challenges and economic benefits. Gomułka’s (2021) economic analysis accentuates Poland’s robust GDP growth, averaging 4% annually over the past decade. This highlights Poland’s economic resilience while Greece has emerged from the aftermath of the 2008 financial crisis and exhibits a slower yet steady recovery (Krajewski, 2018). This analysis navigates the complexities of political stability, regulatory frameworks, and environmental factors. Critical thinking and economic theories will illuminate the path toward an informed and judicious investment choice.

Economic Overview

Poland’s economic landscape has navigated a convergence path, narrowing the development gap with advanced European economies. From 2013 to 2022, Poland’s GDP rose steadily from USD 499 billion to USD 654 billion, reflecting a consistent annual growth rate (Maris et al., 2022). Diversification is a key strength, with sectors like manufacturing and information technology propelling economic expansion. The GDP per capita climbed from USD 13,137 in 2013 to USD 17,380 in 2022, indicative of improving living standards per neoclassical economic principles emphasizing private enterprise.

Poland’s EU integration contributes significantly to its economic narrative. 2025, the country is forecasted to face a general government deficit of 3.9% of GDP, reflecting ongoing fiscal challenges (Korzeb & Niedziółka, 2020). The application of Keynesian principles is evident as policymakers grapple with inflation (16.6% in 2022) through strategic fiscal and monetary measures. Poland’s economic overview is a story of resilience and convergence, guided by market-oriented reforms and EU collaboration. Gomułka (2021) highlights its economic trajectory, portraying a nation strategically positioned for continued growth amidst global economic dynamics.

Greece ranks the 53rd largest global economy, showcasing a nominal GDP of $242.385 billion. The nation’s economic structure primarily relies on the service sector (contributing 80%) and industry (16%), with agriculture comprising 4% of the total output (Toplišek, 2020). Integral industries include tourism and shipping, bolstering the economy and contributing to Greece’s position as a significant agricultural producer in the European Union.

Greece implemented substantial debt restructuring, reducing the sovereign debt burden from €356 billion to €280 billion in 2012. Following the economic decline, the country achieved modest growth rates, with an 8.4% GDP rebound in 2021 and 5.9% in 2022 after the COVID-19-induced global recession (Zimon & Tarighi, 2021). Exiting the EU’s enhanced surveillance framework in August 2022 marked a pivotal moment, granting Greece greater economic autonomy. The later downturn reflects the challenges of sustaining growth and managing external debt. The impact of austerity measures during the crisis aligns with theories emphasizing the role of fiscal policy in economic recovery. Despite recent economic successes, Greece faces enduring challenges, including high unemployment, bureaucratic inefficiencies, and low global competitiveness. Institutional economics and public choice theories concur on the need for structural reforms and efficient governance.

Regulatory Environment and Currency Risk

Poland has implemented reforms to align with European Union standards, promoting a business-friendly atmosphere. Notable initiatives include simplifying administrative procedures, enhancing legal frameworks, and encouraging foreign investment. According to the World Bank’s Doing Business report, Poland ranked 40th globally in 2021, reflecting its commitment to fostering an efficient and transparent business environment (World Bank, 2021). Vyshnevskyi et al. (2020) Poland’s efforts to maintain a stable regulatory environment, attracting foreign investors and fostering economic growth. The correlation between regulatory reforms and increased foreign direct investment as economic theories emphasize the role of institutions in promoting economic development.

Poland’s currency risks are primarily associated with its national currency, the Polish złoty (PLN). Currency risk arises due to fluctuations in exchange rates, impacting the value of transactions, investments, and debt (Bitzenis, 2020). Poland’s currency has experienced both periods of appreciation and depreciation, influenced by global economic conditions and domestic factors.

Greece has undergone transformative changes aimed at simplifying bureaucratic processes and enhancing legal frameworks have been evident. According to the World Bank’s Doing Business report, Greece improved its business efficiency, ranking from 100th in 2020 to 79th in 2021 (World Bank, 2019). Such advancements suggest a commitment to fostering a more business-friendly environment, which, over time, can stimulate economic activities. The Greek economy contends with currency risk, with the euro (EUR) as its official currency. World Bank (2021) illustrates Greece’s experience with currency challenges, particularly during the European debt crisis. The Mundell-Fleming model navigated the currency risks using fiscal and monetary policies. Greece’s adoption of the euro eliminates individual control over monetary policy, adding complexity to managing economic shocks.

Political Stability and Environmental Structure

Poland has established itself as a politically stable country in recent decades. The transition from communism to democracy in 1989 laid the foundation for political stability. The country’s commitment to the European Union (EU) and NATO has further solidified its political framework. With the Modernization Theory, Poland’s political institutions have evolved, contributing to stability (Rosati & Wiliński, 2019). The peaceful transfer of power through democratic elections reflects the consolidation of democratic norms. Poland’s environmental structure balances economic development with environmental sustainability. The country has implemented policies that shift towards renewable energy sources, and efforts to reduce carbon emissions showcase a commitment to environmental responsibility. The EU’s influence and environmental governance theories have shaped Poland’s environmental policies, promoting conservation and sustainable resource management.

Greece has experienced political challenges, particularly during the economic crisis from 2010 to 2018. In recent years, we have seen efforts to restore stability. The country’s return to economic growth and resolving its debt crisis indicate a gradual restoration of political stability (Fakiolas, 2023). Greece, endowed with diverse ecosystems, faces environmental management complexities. The country faces Challenges, including wildfires and climate change, necessitating a proactive approach.

Investment Comparison

In comparing potential investments, Poland emerges as a robust contender, boasting a resilient economy with consistent GDP growth, diversification across sectors, and a commitment to market-oriented reforms. Greece, emerging from the aftermath of the 2008 financial crisis, showcases a slower but steady recovery. The nation has implemented significant debt restructuring and achieved positive GDP growth rates post-COVID-19. Exiting the EU’s enhanced surveillance framework marks a key milestone, granting Greece greater economic autonomy. However, persistent challenges, including high unemployment and bureaucratic inefficiencies, underscore the importance of targeted policies for sustained growth.

Both Poland and Greece have made strides to enhance their business-friendly atmospheres. Poland, ranked 40th globally in the World Bank’s Doing Business report, showcases efforts to simplify administrative procedures and improve legal frameworks, fostering a transparent regulatory environment. With an improved ranking of 79th in 2021, Greece demonstrates a commitment to similar reforms, stimulating economic activities over time (World Bank, 2021). With the Polish złoty, Poland faces fluctuations influenced by global and domestic factors. Greece, utilizing the euro, navigates challenges arising from the Eurozone framework, limiting individual control over monetary policy.

Poland has a history of stability since its transition from communism to democracy in 1989. Commitment to the European Union and NATO further solidifies its political framework. While gradually restoring stability, Greece has faced challenges, particularly during the economic crisis. Poland aligns with environmental theories, emphasizing sustainable development, renewable energy, and carbon emission reduction. Greece, facing environmental challenges like wildfires and climate change, implements conservation strategies influenced by EU directives.

Considering the comprehensive analysis of Poland and Greece, the investment decision for £100 million leans towards Poland. Poland’s robust economic growth, diversification, stable regulatory environment, and commitment to environmental sustainability position it as an attractive investment destination. While Greece exhibits positive economic trends post-crisis, persistent challenges and a slower recovery suggest a higher level of risk. The decision should align with risk tolerance and long-term objectives, recognizing Poland’s resilience and convergence as key factors in making an informed and judicious investment choice.

Bitzenis, A. (2020). Sovereign debt crisis in Greece and its relation with foreign direct investment and competitiveness in Greece.  Economic growth in the European Union: Analyzing SME and investment policies , pp. 155-166. https://link.springer.com/chapter/10.1007/978-3-030-48210-7_11

Dumitrescu, A. L., & Iordache, L. (2015). Poland’s Performance in Building a Sustainable Market Economy.  Revista de Economie Mondiala/The Journal of Global Economics ,  7 (2). https://ideas.repec.org/a/iem/journl/v7y2015i2id2822000009356035.html

Fakiolas, R. (2023). Interest groups: An overview.  Political Change in Greece , pp. 174-188. https://www.taylorfrancis.com/chapters/edit/10.4324/9781003457954-12/in

Gomułka, S. (2021). THE COMPARATIVE ANALYSIS OF POLAND AND GREECE: SHORT-TERM POLICY ERRORS VERSUS LONGER-TERM RATIONALITY.  EKONOMICZNA , p. 31. https://mysl.lazarski.pl/fileadmin/user_upload/oficyna/Mys__l_EiP_1-21_akcept.pdf#page=31

Korzeb, Z., & Niedziółka, P. (2020). Resistance of commercial banks to the crisis caused by the COVID-19 pandemic: the case of Poland.  Equilibrium. Quarterly Journal of Economics and Economic Policy ,  15 (2), 205-234. https://www.ceeol.com/search/article-detail?id=898620

Krajewski, S. (2018). Assessment of Poland’s Economic Policy During the Crisis.  Olsztyn Economic Journal ,  8 (3), 195-210. https://doi.org/10.31648/OEJ.3230

Maris, G. (2022). Introduction: Eurozone and the Greek economic crisis in 2020: current challenges and prospects.  European Politics and Society ,  23 (4), 443–446. https://www.tandfonline.com/doi/abs/10.1080/23745118.2021.1895551

Maris, G., Sklias, P., & Maravegias, N. (2022). The political economy of the Greek economic crisis in 2020.  European Politics and Society ,  23 (4), 447-467. https://www.tandfonline.com/doi/abs/10.1080/23745118.2021.1895552

Napiórkowski, T. M. Foreign Direct Investment in Poland and Polish Investment Abroad.  Focus on Entrepreneurship and Competitive Advantages , 77. https://www.researchgate.net/profile/Arkadiusz-Kowalski-3/publication/374931977

Rosati, D., & Wiliński, W. (2019). Outward foreign direct investments from Poland. In  Facilitating Transition by Internationalization  (pp. 175-204). https://www.taylorfrancis.com/chapters/edit/10.4324/9781315255583-10/outward-foreign-direct-investments-poland-dariusz-rosati-witold-wili%C5%84ski

Skordoulis, M., Ntanos, S., & Arabatzis, G. (2020). Socioeconomic evaluation of green energy investments: Analyzing citizens’ willingness to invest in photovoltaics in Greece.  International Journal of Energy Sector Management ,  14 (5), 871-890. https://www.emerald.com/insight/content/doi/10.1108/IJESM-12-2019-0015/full/html

Toplišek, A. (2020). The political economy of populist rule in post-crisis Europe: Hungary and Poland.  New Political Economy ,  25 (3), 388–403. https://www.tandfonline.com/doi/abs/10.1080/13563467.2019.1598960

Vyshnevskyi, O., Stashkevych, I., Shubna, O., & Barkova, S. (2020). Economic growth in the conditions of digitalization in the EU countries.  Studies of Applied Economics ,  38 (4). https://ojs.ual.es/ojs/index.php/eea/article/view/4041

World Bank. (2021).  Return on Investment of Public Support to SMEs and Innovation in Poland . World Bank. https://elibrary.worldbank.org/doi/abs/10.1596/33550

Zimon, G., & Tarighi, H. (2021). Effects of the COVID-19 global crisis on the working capital management policy: Evidence from Poland.  Journal of Risk and Financial Management ,  14 (4), 169. https://www.mdpi.com/1911-8074/14/4/169

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Essay on the Investment Decisions of a Company | Accounting

Read this essay to learn about:- 1. Introduction to Investment Decisions 2. Accounting Rate of Return on Investment 3. Pay Back Period of Investment 4. Net Present Value Method 5. Present Value Profile of N 6. Adjusted Net Present Value Method.

Essay # 1. Introduction to Investment Decisions:

For the purpose of evaluating an investment proposal, one or more of the different method(s) mentioned in the learning objectives is (are) used. Profit is a traditional parameter which can be used to test whether an investment proposal is to be undertaken.

On the other hand, an alternative and widely used view is that cash flow is the appropriate parameter to evaluate an investment proposal. As you have already learnt the distinction between cash flow and profit, you will appreciate that cash is more objectively measured parameter than profit. In this chapter we shall discuss profit based as well as cash flow based tech­niques for evaluating an investment proposal.

In an investment proposal initial cash outflows occurred for acquisition, construction or development of various fixed assets like land, building, plant and machinery, furniture and fixtures, etc. and for working capital. Initial cash outflows for acquisition, construction or development of fixed assets are incurred over a period which is termed as “construction period”. Once the fixed assets are ready for use, working capital is also employed and the project is put to use.

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While in operation, the project generates the cash inflows/profit and also there will be cash outflows for maintenance of the fixed assets. Such subsequent cash outflows in­curred for maintenance of fixed assets are part of operating expenses/ outflows. In accounting measures depreciation on fixed assets is treated as an item of expense while in cash flow measure depreciation is a non­cash item reflecting only notional recovery of historical cost of depre­ciable fixed assets.

In Cash flow methods, timing of cash flow is very important. In an invest­ment proposal timing of various cash inflows and outflows are evaluated using appropriate discount factor. This discount factor should be the WACC of the project. It is also possible to discount the cash flow using a required rate of return higher than WACC.

Cash Flows Versus Profit :

Let us first understand the distinction between profit and cash flow which will be helpful for building a sound conceptual base on investment evaluation techniques.

Illustration 1:

Ramjos Ltd., a newly established company wants to establish a chemical factory.

The accountant of the company has estimated the initial cash outflows as given below:

Land Rs.20 million, Building Rs.100 million, Plant and Machinery Rs.1000 million.

Expected life of the building is 10 years and that of plant and machinery is 5 years. Resale value of the building after 5 years is Rs.75 million and that of plant and machinery is Rs.100 million. The company will follow straight line method of depreciation. For income-tax purpose deprecia­tion is to be calculated using written down value method. Rate of depreciation for building is 5% and that of plant and machinery is 25%. Assume that any un-depreciated value of machinery and building after adjustment of scarp value/resale value will be entitled to get tax benefit at the end of useful life of the fixed assets at the full rate of tax. Full rate of corporate tax is 35% plus surcharge 5%.

The accountant has projected sales on the basis of market forecast which is more or less stable over the life of the project and estimated at Rs.2000 million, and cash expenses are estimated at Rs.800 million.

The company has decided to finance the project using equity share capital. Unlevered beta of similar company is 0.6. You may use 14% market return and 6% risk free rate for determining cost of equity.

Find out PAT and cash flow arising out of this investment proposal. Also prepare projected balance sheets of the investment proposal.

Projected Profit and Loss Accounts and Cash Flow Statements:

Note 1: Accounting Depreciation :

Building = (Rs. 100 million – Rs. 75 million)/5

Plant & machinery = (Rs. 100 million – Rs. 100 million)/5

Note 2: Tax Deprecation:

Note 3: Deferred Tax Provision:

As per AS -22 deferred tax liability/asset should be created on the basis of timing difference. One important source of timing difference is difference between accounting and tax depreciation.

Note 4: Provisions for Current tax:

1. Reserves & Surplus = Cumulative PAT

2. Cash & Bank balance = Cumulative operating cash flow

3. Deferred Tax Liability = Cumulative deferred tax provision

Essay # 2. Accounting Rate of Return on Investment:

Return on Capital Employed (ROCE) and Return on Equity (ROE) are two popular capital based performance ratios which can be used for evaluating investment proposal as well.