- 10 Marks
Question
a) Senchi Ltd is evaluating an investment proposal to manufacture River boat, which has performed well in test marketing trials conducted recently by the company’s research and development division.
Required:
Identify and explain the stages in the capital investment decision-making process. (10 marks)
Answer
The key stages in the capital investment decision-making process are:
- Identifying Investment Opportunities: Investment opportunities or proposals could arise from the analysis of strategic choices, the business environment, research and development, or legal requirements. The key requirement is that investment proposals should support the achievement of organizational objectives.
- Screening Investment Proposals: In the real world, capital markets are imperfect, so it is usual for companies to be restricted in the amount of finance available for capital investment. Companies, therefore, need to choose between competing investment proposals and select those with the best strategic fit and the most appropriate use of economic resources.
- Analyzing and Evaluating Investment Proposals: Candidate investment proposals need to be analyzed in depth and evaluated to determine which offer the most attractive opportunities to achieve organizational objectives, for example, to increase shareholder wealth. This is the stage where investment appraisal plays a key role, indicating, for example, which investment proposals have the highest net present value.
- Approving Investment Proposals: The most suitable investment proposals are passed to the relevant level of authority for consideration and approval. Very large proposals may require approval by the board of directors, while smaller proposals may be approved at the divisional level, and so on. Once approval has been given, implementation can begin.
- Implementing, Monitoring, and Reviewing Investments: The time required to implement the investment proposal or project will depend on its size and complexity and is likely to be several months. Following implementation, the investment project must be monitored to ensure that the expected results are being achieved and the performance is as expected. The whole of the investment decision-making process should also be reviewed in order to facilitate organizational learning and to improve future investment decisions.
(5 points well explained @ 2 marks each = 10 marks)
- Topic: Decision making techniques, Introduction to capital budgeting
- Series: MAY 2020
- Uploader: Dotse