Nature And Importance Of Decision Making In Investment Finance Essay

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Very important if decision-making process rely on scientific methodology of thinking and analysis to invest specific resources for certain period of time with considering of risks and uncertainty, and also important form the point of view that to set approaches to achieve these objectives, where the success in these tasks are limited by how much decision-makers are follow scientific method to collect information needed to take a decision, important also because it gives opportunity to evaluate expected revenue from all proposed investment options, and to select the appropriate investment that comply with objectives of organization and to enable decision-makers the opportunity to chose from well studied selections of investments..

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It’s important also because it consider for the concept of investment choices and chances, qualification and experience, convenient (that to chose the right and suitable investment), and to aware for diversify the investment risks, all these determinants makes the right decision in investment is a master key of success, because it is very easy to decide of investment but if is it the right one?

Principles of investment decision:

The most convenient strategy of investment that one consider basically on priority of investors according to their view about business which usually affected by many factors as profitability which determine by rate of return, and liquidity and certainty that rely on how much business resist against risks. But decision-making process should also consider for investment determinants:

Interest rate: with its indirect relation with investment according to economic concepts on investment (opportunity cost)

Capital marginal efficiency: represent the marginal productivity of invested capital and also defined by return on invested capital.

Scientific and technological development: what huge development in technology is offers new investment opportunity and assist the existed one with pivotal facilities on communication and software, since computer and internet be as revolution in business.

Risk rate: when we classified investors for three categories, as risk avoiders, risk seekers, and those in between the two categories.

Economic and political settlement on investment climate: the clear example is Iraq today compare to Iraq before first Gulf war 1991.

Others factors: society awareness with importance of save and investment with attainability to active financial market.

The importance of trade-offs between investment projects

To use of scarce resources should follow a very proper and rational decision of how to invest these resources with lowest wastes possible, that by use of all means of comparative advantages through scientific approach to search for appropriate investment that able to ably, then to prepare the scheme/s bases by studying capital required, costs estimation, size, location, technologies needed, expected demand etc.

Trade-offs between investments choices as fateful decision must based on comprehensive and very precise steps and should consider for all pros and cons of evaluation measurements, and use the best appraisal standards between investment choices.

Investment appraisal methods

These appraisal methods are categorized in two groups, the first one is the un deducted profitability standards in certain conditions, first one is the accounting rate of return ARP, with no consideration for tax and depreciation this method give feasibility of investment by compare the result of ARP and market interest rate, investment can be acceptable and feasible when ARP is bigger than Interest rate, second is payback period PP, as short as period to return capital of investment as investment is more feasible, period of return calculated by divide primary investment costs by annual net cash flow, this method is widely used worldwide as all information required to run is available and also because this method is more appropriate for investment in fluctuated conditions with high levels of uncertainty, this method also criticized as it neglect the profits after return of capital because it focused only on period that investment could return the capital, neglects the time value of money when it is not deal with time of cash flow.

Deducted profitability standards, as Net present value NPV, the method characterized as logic and precise added to its consideration to deduct cash flow in order to determine the present value, this method uses in international financial organization as appraisal to evaluate investment, the method criticized as it consider only for achieved return and doesn’t consider for the capital amount invested to create that returns, the last method is the internal rate of return IRR, this method still adopted by international monetary fund, world bank to evaluate investment and to give loans, the standard of this methods based on rate of discount that when in flow of cash is equal to out-flow of cash, which means the discount that value investment to zero, the method also criticized as the expected cash flow according to the IRR invested usually with the same discount price, the matter is not logic in grand investment where high interest rates usually adopted.

Conclusion:

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