A long-term investment decision is also called as capital budgeting decision. It involves committing the finance on a longterm basis.
The following are certain factors which affect capital budgeting decisions:
1. Cash flows of the project: When a company takes an investment decision involving huge amount, it expects to generate some cash flows over a period. These cash flows are in the form of a series of cash receipts and payments over the life of an investment. The amount of these cash flows should be carefully analysed before considering a capital budgeting decision.
2. The rate of return: These calculations are based on the expected returns from each proposal and the assessment of the risk involved.
3. Investment criteria: The decision to invest in a particular project involves a number of calculations regarding the amount of investment, interest rate, cash flows and rate of return. There are different techniques to evaluate investment’proposals which are known as capital budgeting techniques. These techniques are applied to each proposal before selecting a particular project.
