Function of Finance : Investment Decision

Function Of Finance :
A. Investment Decision:-
 Investment decisions relate to selection of assets in which funds are to be invested by the firm.
Investment alternatives are numerous. Resources are scarce and limited. They have to be rationed and discretely used. Investment decisions allocate and ration the resources among the competing
investment alternatives or opportunities.  The effort is to find out the projects, which are acceptable.
Investment decisions relate to the total amount of assets to be held and their composition
in the form of fixed and current assets. Both the factors influence the risk the organisation is
exposed to. The more important aspect is how the investors perceive the risk.
The investment decisions result in purchase of assets. Assets can be classified, under two
broad categories:
(i) Long-term investment decisions – Long-term assets
(ii) Short-term  investment decisions – Short-term assets
Long-term Investment Decisions:  The long-term capital decisions are referred to as capital
budgeting decisions, which relate to fixed assets. The fixed assets are long term, in nature.
Basically, fixed assets create earnings to the firm. They give benefit in future. It is difficult to
measure the benefits as future is uncertain.
The investment decision is important not only for setting up new units but also for expansion
of existing units. Decisions related to them are, generally, irreversible. Often, reversal of decisions
results in substantial loss. When a brand new car is sold, even after a day of its purchase, still,
buyer treats the vehicle as a second-hand car. The transaction, invariably, results in heavy loss for
a short period of owning. So, the finance manager has to evaluate profitability of every investment
proposal, carefully, before funds are committed to them.
Short-term Investment Decisions: The short-term investment decisions are, generally, referred
as working capital management. The finance manger has to allocate among cash and cash equivalents,
receivables and inventories. Though these current assets do not, directly, contribute to the earnings,
their existence is necessary for proper, efficient and optimum utilisation of fixed assets.