Welcome to the guide to UK IFAs
Welcome to the UK's most comprehensive directory of financial advisors
The nature of capital budgeting decisions
An investment decision is essentially a largely irreversible commitment of resources made in the expectation of securing generally uncertain future gains.
On this definition investing in short-dated government securities is not an investment decision since the risk is negligible and the investment can be reversed immediately by selling the securities without loss. Investing in plant or buildings, however, is an investment decision because it cannot usually be reversed, that is the capital cannot be recovered without incurring significant losses when the assets are sold or converted to other uses.
Moreover, the expected return from the investment is generally subject to a significant degree of risk. The definition of investment decisions also logically includes leasing decisions which commit a company's current and future resources to meeting the lease payments.
The twin characteristics of irreversibility and risk give rise to the critical importance of capital budgeting in the management of a company. With the growing complexity and highly specific character of modern production and marketing methods, investment decisions are becoming more irreversible.
Thus investment decisions are increasingly determining the direction and pace of a company's future growth and limit the opportunities open to it in much the same way that the tracks determine the speed and directions open to a locomotive. This and the increasingly capital intensive nature of modern production methods necessitate careful consideration of the methods used for investment appraisal.
IFFA - the directory of Financial Advisors
A good accountancy and management department covers the basic techniques of investment appraisal and the related issues in both company finance and corporate taxation. It gives a full explanation of the discounted cash flow method and sets out a simple graphical procedure (the optimal replacement method) whereby this method can be used for analysing replacement decisions.
Investment appraisal cannot be adequately conducted in isolation from considerations of company finance and taxation. These are therefore examined with particular emphasis on the considerable changes brought about by the introduction of corporation tax. A comprehensive account of the rates of return which companies should look for from different categories of investments under corporation tax conditions is also given.
IFAs structure and Organisation
The shape and structure of any organisation, and the systems by which is works, are designed by senior management (financial and nonfinancial), financial specialists such as accountants and corporate planners, and business schools, whether or not they do so consciously. It assumes no knowledge of, and in the text makes no use of, mathematics. It does, however, attempt to provide the theoretical understanding essential to sound practice. A number of case studies are given as practical illustrations.
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