Complete 10 page APA formatted essay: Capital Investment Decision Making Processes in an Organisation.
Project Finance refers to the financing of long term based projects like infrastructure depending on the project’s anticipated cash flows. The finance for the project is extended by financial institutions and equity investors. These loans are backed by the assets of the project and the cash flows generated from the project is used to pay the project loan. There has been a significant change in the concept of investment appraisal over the past 250 years. Previously the investment making decisions were based on the intuition and knowledge of the business owners. Currently, the decisions relating to the investments are focused on the financial tools which consider the risk inherent in the project, the time value of money, project duration, simulations and weighted average cost of capital.
At present, the prospective investors and the external stakeholders have access to the accounting data of the company and estimate the economic rate of return of the firm on the basis of these accounting figures. Danielson & Press (2003) highlight that there exists a relation between the economic and accounting rate of return. According to Parker (1968), the risk analysis methods and time value concept were incorporated in the cash flows of the insurance companies even in the nineteenth century. However, it took some time for the discounted cash flow technique (DCF) to gain acceptance among the general businesses (Chapman, et al., 2007).
The managers of the publicly traded companies in the US rely more on the DCF technique today as compared to the past. This situation is similar for the other countries like South Africa, Britain, Sweden, and other European countries. A survey of the Industrial Sector listed companies of Johannesburg Stock Exchange (2000) has shown that two-thirds of the surveyed South African companies use DCF technique to make investment decisions. .