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Factors which will affect business investment and Cameron Balloons Investment decisions

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Introduction

Other factors which will affect business investment and Cameron Balloons Investment decisions There are different factors which will affect the decision that a business will make about their investments. The factors which will affect the business investment are: Capital rationing - this is when a firm has few profitable investment opportunities but do not have enough capital to fund them. There are two different types of capital rationing. One is Hard Capital Rationing and the other one is Soft capital Rationing. * Hard Capital Rationing - this will take place if the capital shortages are result of external influences. * Soft Capital Rationing - this type of capital rationing will happen because of internal constraints. Inflation - this is when prices rise, and if prices are raising speedily investment decisions become trickier. Fast inflation will decrease the value of the money and as the prices rise the value of the money in future will become valueless. This will also have an effect on the investment if the interest rates start to rise. Taxation - it is legal for a business to pay tax. There has been a reduction recently in taxes on profit which will mean that the business can keep more of its profits. ...read more.

Middle

Other alternatives of investment to be financed There are different options for a business to finance their investments. For example if the business is a plc they have the option to use the share capital or loan capital for their investments, but there are benefits and drawbacks for businesses to use some of these methods. Cameron Balloons may decide to use leasing as a source of finance for their investment project. Leasing - provides the occasion of renting an asset. If Cameron Balloons cannot meet the expense of an asset such as property, machinery or vehicles outright then they may have the chance to lease. This is also a good way of acquiring such resources as they may be required for simply short period of time. Leasing group also covers the maintenance and repair expenses. If the leasing is for long periods of time this may be costly for the Cameron Balloons. There are various types of leasing and most frequent types of leasing are Operating Lease and Finance Lease. * Operating Lease - this is when the business pays for the use of the asset for particular period of time and then the asset is returned to the leasing company. ...read more.

Conclusion

The higher the percentage is the more valuable it is to invest in that investment project. The ROCE for Cameron Balloons Machine 1 25,000 X 100 = 62.5% 40,000 The ROCE for Machine 1 is 62.5% Machine 2 30,000 X 100 = 24% 125, 000 The ROCE for Machine 2 is 24% Below is the Net Present Value calculation table which undoubtedly shows that the net income from machine 1 is more imperative for a business to invest in. The net income of machine 2 is lower which is not valuable as machine 1. I recommend that Cameron Balloons should invest in Machine 1 which has a better net present value. Net Present Value for Cameron Balloons Income - year 1 -present value Income - year 2 -present value Income - year 3 -present value Income - year 4 -present value Income - year 5 -present value Total income- present value Cost of machine Net income Machine 1 18957.345 14375.561 11925.042 7269.7899 4594.1807 57121.917 40000 17121.917 Machine 2 47393.364 40431.266 21294.718 16155.088 11485.451 136759.87 125000 11759.87 When looking overall at the investment appraisal methods I have used and the results that I have obtained evidently identifies that Cameron Balloons will have more profit and rewards if they decide in Machine 1. ...read more.

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