Criterias In Investment Decisions

Note : I am going to add my Corporate Strategy Assigment when i was at the university about Financial Investment Methods. Enjoy it :)

PART -17

8.1      CRITERIAS IN INVESTMENT DECISIONS

The discount rate and the risk premium

Another important element of time is uncertainty, namely risk. Because there is always the possibility not to pay the borrower's debt and this danger increases with prolonged maturity. The risk grows with time period between the two grows larger the risk. If the risk grows, the time value of money will grow.

Making a huge factor in the financial sector is loan funds loss because of the time value and techniques to compensate for the risk faced by the search for financing.

An enterprise value of discounted cash flow method, the selection is very important in determining the appropriate discount rate.

In determining the discount rate, the sector's characteristics, competitive factors such as cost of capital are used in businesses.

Discounted cash flow method, as the discount rate used is usually the cost of capital.

Decision criteria

Is difficult to predict future cash flows will provide a business, it can not be fully predicted.

While the company's estimated future cash flows, current cash flow and previous year’s cash flow are both investigated together.

While in past years and projected future status of the current year the business is used as the indicator.

However, when estimating the cash flows related items must be projected to the future after the necessary corrections.

Interest coupons printed on the Bonds. Therefore, the security of the data created by the net cash flows, do not have to guess.

On the other hand, there are some critical subjects, which have to be examined at the decision of the projects. These situations follow as figured below. Situations 1, 2 and 3 are only to consider the single project. Situations 4 and 5 are for critical decision to select alternative investment projects, which are mutually exclusive.

Situation 1:

Situation 2:

Situation 3:

Situation 4:

Situation 5: