Why is it important to carefully evaluate the capital investment decisions?


One of the most important long term decisions for any business relates to investment. Investment is the purchase or creation of assets with the objective of making gains in the future. Typically investment involves using financial resources to purchase a machine/ building or other asset, which will then yield returns to an organization over a period of time.

Key considerations in making investment decisions are:
1 what is the scale of the investment - can the company afford it?
2 How long will it be before the investment starts to yield returns?
3 How long will it take to pay back the investment?
4 What are the expected profits from the investment?
5 Could the money that is being ploughed into the investment yield higher returns elsewhere?

The Capital Investment decisions predict the expected future cash flows of the project and analyses the risk associated with those cash flows. Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value.

The main goal of any organization is to increase the shareholder’s wealth, and a good investment decision will improve the firm’s value in future. An investment today will determine the firm’s strategic position many years hence, these investments also have a considerable impact on the organization’s future cash flows. Capital budgeting decisions thus have a long range impact on the firm’s performance and they are critical to the firm’s success or failure.


2) Identify and discuss the key stages in the Capital investment appraisal decision making and control cycle.


1) Identify potential investments- The identification of investment opportunities and generation of investment project proposals is an important step in the capital budgeting process. Project proposals cannot be generated in isolation. They have to fit in with a firm’s corporate goals, its vision, mission and long-term strategic plan. Of course, if an excellent investment opportunity presents itself the corporate vision and strategy may be changed to accommodate it.


2) Explore alternative investments-
3) Consider costs & consequences of alternatives-
4) Choose projects for implementation-
5) Obtain necessary funding-
6) Put project in motion and motion performance-





3) Outline two key advantages of auditing the performance of a Capital Investment Project.

Post-implementation audit does not relate to the current decision support process of the project; it deals with a post-mortem of the performance of already implemented projects. An evaluation of the performance of past decisions, however, can contribute greatly to the improvement of current investment decision-making by analyzing the past ‘rights’ and ‘wrongs’. If projects undertaken in the past within the framework of the firm’s current strategic plan do not prove to be as lucrative as predicted, such information can prompt management to consider a thorough review of the firm’s current strategic plan.