2 competitors strategy many a time an investment is

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2. Competitors ‘strategy Many a time an investment is taken to maintain the competitive strength of the firm; If the competitors are installing new equipment to expand output or to improve quality of their products, the firm under consideration will have no alternative but to follow suit, else it will perish. It is, therefore, often found that the competitors’ strategy regarding capital investment plays a very significant role in forcing capital decisions on a firm. 3. Demand forecast The long-run forecast of demand is one of the determinants of investment decision. If it is found that there is a market potential for the product in the long run, the dynamic firm will have to take decisions for capital expansion. 4. Type of management Whether capital investment would be encouraged or not depends, to a large extent, on the viewpoint of the management. If the management is modern and progressive in its outlook, the innovations will be encouraged, whereas a conservative management discourages innovation and fresh investments. 5. Fiscal policy Various tax policies of the government (like tax concessions on investment income, rebate on new investment, and method of allowing depreciation deduction allowance) also have favourable or unfavourable influence on capital investment. 6. Cash flows Every firm makes a cash flow budget. Its analysis influences capital investment decisions. With its help the firm plans the funds for acquiring the capital asset. The
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220 budget also shows the timing of availability of cash flows for alternative investment proposals, thereby helping the management in selecting the desired project. 7. Return expected from the investment In most of the cases, investment decisions are made in anticipation of increased return in future. While evaluating investment proposals, it is therefore essential for the firm to estimate future returns or benefits accruing from the investment. 8. Minimum Rate of Return on Investment Every management expects a minimum rate of return or cut off rate on capital investment. It refers to the point of below which a project would not be accepted. 9. Future earnings The future earnings may be uniform or Fluctvating. Even though, the company expects guaranteed future earnings in total which affects the choice of a project. 10. Ranking of the capital investment proposal Only one profitable project out of many and huge amount is available in the hards of management there is no need of ranking of capital investment proposal. Ranking is necessary if there is many profitable projects in hand and limited funds is available in the hards of management. 18.3.3 KINDS OF CAPITAL BUDGETING DECISIONS The overall objective of capital budgeting is to maximise the profitability of a firm or the return on investment. This objective can be achieved either by increasing the revenues or by reducing costs. Thus, capital budgeting decisions can be broadly classified into two categories: 1. Those which increase revenue, and Those which reduce costs
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