Accounting – Capital Investments


Accounting – Capital Investments



Capital investment decision is part of the Capital budgeting that is making critical decisions to maintain the long term investments of the firm. There are several factors that increase the risks when making capital investment decisions. Risk is the uncertainty that is connected to different forms of investments depending on the type of investment that is being considered and the conditions of the operations. Economic and market conditions are on e of the factors that face most investments. Economic risks stem from the consumer spending habits and saving abilities. Other factors are the inflation and unemployment levels. Market conditions are the factors that may hinder free movement of goods, restrictive trade protocols and the availability and the supply of labour and raw materials. Taxes and interests rates are also part of the factors that must be considered when making major capital investments decisions. These factors influence the cash flow of a project. (Arnold, 1996)

Other internal management risks that involve the decisions of the management like the portfolio balance also have to be considered. A firm involves combination of portfolio assets and since the returns and the risks associated with these assets are not the same. A firm’s portfolio of assets affects the risks of the firm’s portfolio. The decision of investing in a particular class of shares only posses a big risk to the company. (Dorfman, 1997)  To invest only in one type of shares increases the risks more than when the shares are distributed to several classes of different types of shares. The shares of a company that have different classes of shares are well placed to cope with different impacts on the stock market. A decision to diversify the classes of shares and in different investment options widens and reduces the impact of any risks associated with the stock market.

A milestone is a particular event that is normally placed at the completion stage to mark its end or completion of the work or phase. It not only shows the distance travelled but it also denote the general direction of the travel as a key decision concerning the milestone may alter the route and the project plan.

When a milestone has been combined with a PERT (Program Evaluation and Review Technique) or the CPM (Critical Path Analysis) it allows the management to make accurate determination of the projects period schedules and the exact determination of slacks or floats. Milestones are used to determine and monitor progress. Their major limitation is that they only indicate progress on the critical path only and does not reflect the activities of the non critical path activities. (Drury, 1992)

The fall of large multinational corporations like the Lehman brothers in 2008, have made Americans to rethink their capital investment decisions. The over reliance on one particular stock caused major companies to collapse. Most companies are diversifying their portfolios to reduce the risks and effects of over reliance on particular investments and on one class of stock. (Lucey, 1996)

To conclude, making decisions is a very challenging area in management. Decision making is actually impossible without the possibility of threats and risks that can affect the profitability of the firm. In order to give a clear prediction of the conduct of the future projects, there is need to analyze the firm or group of variable factors which can ultimately affect the project.





Lucey T. (1996) Management accounting. London: DP publications

Arnold J. (1996) Accounting for management decisions. Prentice Hall Europe

Drury C. (1992) Management and Cost Accounting. London: Chapman & Hall

Dorfman, S. (1997) Introduction to Risk Management and Insurance (6th Ed.). Prentice Hall.



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