A literature review on Capital Investment Decisions - Essay Example

of the Topic: Capital Investment Decisions- A Literature Review. Investments decisions are made in order to distribute extensive sum of key income to people, technological innovations, of an organisation. The decision has to be made in such a way that a prior analysis concerning the positive consequences should be done. Capital investments decision making is a decision taken for a long term functioning of a business in relation to investments. A decision is made on affordability and calculations of whether the company would be able to bear the investment amount and whether it would be able to get back considerable return over a period.

Some experienced investors feel that while making investments decisions it is very important to have a personal involvement rather than admitting a broker. The Global Investment Institute [2007] observes that relying on brokers will lack attention towards the account section, which seems to help a lot in increasing the returns of investments. In addition to that it says, “You need to become familiar with each stock you have in your portfolio so that you can make decisions on your own in the short-term, while still relying upon your financial advisor to structure your portfolio with a mix of the right instruments (stocks, bonds, money market, etc.) to help you make money in the long run”.

Global-Investment-institute.com [2007]. Investment decision making is not an easy job, as the people involved in decision-making process have to calculate the previous income statements of the company or business is addition to evaluating all the accounts report and statistical details of the profit and loss of the company. Capital investments decisions have to be prepared relying on the returns and analysing whether the investment would be profitable. However, they are found to be useful in terms of “formulating long term goals”, “recognition of statistically dependent proposals”, “estimation and forecasting of current and future cash flows” etc observes [fao.

org 2007] in addition to this fao.org initiates the economic evaluation of the investment proposals as another important aspect of investment decision making. The investment alternatives also have to be considered in order to make the decision in a profitable way. The investment analysis plays a very important role as a precautionary step in decision-making as there appears to be risks in returns, which would be acting as a major drawback in the financial conditions of a business or a company.

There are instances of wrong decision-making in which there might be either lack of organised analysis on the accounts of the company or failure of accounts maintenance present. Some economists observe the wrong decision making process because of dense behaviour of the decision maker. For example, Katz quotes some of the reasons identified by Kahneman, which are related to our behavioural attitudes as effective factors of wrong investment decisions. They are “Over confidence”, “Representative ness”, “Availability bias”, “Contagious enthusiasm” etc.

which he observes as leading to a risky consequences. In the sense over confidence might allow the decision maker in such a way that he might not be consider the possibility of negative returns even at the least level in addition to expectation of larger returns than the calculated amount. Representativeness results in the investor’s ideology of investment planning based on a previous situation, which might be at risk, as competition exists. Availability bias would allow the investors to go behind a newspaper report before deciding on investments without giving personal attention to calculate the actual investment returns by own.

Overall, the capital investment decision involves a risky job as the investor has to have a wide knowledge of profits and loss of his company or business in comparison with the market value because the capital investment decision making is solely formed to get back the investments through profitable returns.References:Global Investment Institute. “Making Your Own Investment Decisions”. Online available fromhttp://www.global-investment-institute.com/making-your-own-investment-decisions.htmFAO Corporate Documentary Repository .

Chapter 6. “Investment Decisions- Capital Budgeting”. Online available from http://www.fao.org/docrep/W4343E/w4343e07.htmKatz, Deena. “How to avoid wrong investment decisions”. Online available from http://inhome.rediff.com/money/2006/jul/28invest.htm