Natural Resources Policy of Financial Research - Myassignmenthelp.Com

Question: Discuss about the Natural Resources Policy of Financial Research. Answer: Capital investment decisions which is even known as capital budgeting or investment appraisal comprises of undertaking decisions that should have vital future advantages for the firm and its shareholders. The responsibility of the management in undertaking the right decisions on the investments in the long term assets and hence should pursue the key objective of generating additional wealth to the shareholders and the owners, as any faults may lead to a disastrous result and extensive losses. According to Arrow and Lind (2014), undertaking sound and effective business decisions is vital because as specifically huge amount of resources are generally involved and it is generally difficult or costly to back out from an investment after it has been undertaken. A development in the new and innovative technologies, products, equipment, facilities and plants need the requirement and usage of funds and therefore some parts of planning is essential to guarantee the success and to minimise the risk of failure. However, unfortunately various businesses around the globe fail as their capital investments are reliant on the spontaneous process of decision making, false calculations and incorrect factors. This is in some what is acknowledgeable as more than 90% of the businesses around the globe are Small and Medium Enterprises (SMEs) that manufactures more than 50% of the global GDP and employees a huge portion of the population of the world. Even though these companies for the base of the global economy, there has been an observation that most of them have the deficiency of the financial innovation of big businesses and therefore obligate serious mistakes in their decisions with respect to investment that may generally lead to adverse outcomes (Hel ms, Salm and Wstenhagen 2015). There are numerous formal processes and techniques that are exploited more or less efficiently by the managers and the companies in their process of capital budgeting. This can be understood by explaining the four general methods of investment appraisal that can be explained as follows: Accounting Rate of Return (ARR): This is even known as the average rate of return which is a financial ratio addressed in percentage and calculated by dividing the aggregate profit by the aggregate investments undertaken during a project life. It computes the anticipated returns from the net income and shows it in the percentage to the investments that have been made initially (Graham, Harvey and Puri 2015). Conversely, while this process is generally utilised and accepted its crucial restriction has been that it takes no focus on the factor of timing and hence a comparison among the several projects can show them equally attractive while certain others may create a faster investment return but may not be addressed as an effective option for investment. Payback Period (PP): This approach computes the required tine for the investment return to be undertaken from real cash flow that is created by a project. Therefore, the projects that will be able to recover the investments made initially faster are regarded more effective and hence stress on liquidity is given stress over profitability in the payback period method (Lane and Rosewall 2015). The time factors have a crucial role in this aspect and therefore payback period is regarded a better choice than the Accounting Rate of Return process Net Present Value: This method is regarded as a better solution of investment appraisal as it looks into the benefits and costs of a project as well as the timing factor in the process of calculation. The net present value discounts the future anticipated cash inflow from the project of investment explaining the interest that is lost to the investors, the associated risk and inflation that is anticipated (Ã… ½iÃ… ¾lavsk 2014). Internal Rate of Return (IRR): The internal rate of return even exploits the discounting future cash flows in the computation of a specific investment and represents the investment opportunity yields. Internal Rate of Return is the rate of discount that is explained as a percentage that will show a zero value on the net present value when it is implied to the future cash flows. Therefore, if Internal Rate of Return is more than the desired rate of return, then the investment is looked upon as profitable. Reference List Arrow, K.J. and Lind, R.C., 2014. Uncertainty and the evaluation of public investment decisions.Journal of Natural Resources Policy Research,6(1), pp.29-44. Graham, J.R., Harvey, C.R. and Puri, M., 2015. Capital allocation and delegation of decision-making authority within firms.Journal of Financial Economics,115(3), pp.449-470. Helms, T., Salm, S. and Wstenhagen, R., 2015. Investor-specific cost of capital and renewable energy investment decisions. InRenewable Energy Finance: Powering the Future(pp. 77-101). Lane, K. and Rosewall, T., 2015. Firms Investment Decisions and Interest Rates.Reserve Bank of Australia Bulletin. June quarter, pp.1-7. Ã… ½iÃ… ¾lavsk, O., 2014. Net present value approach: method for economic assessment of innovation projects.Procedia-Social and Behavioral Sciences,156, pp.506-512.