Investment decisions are the most critical as they usually involve huge sums of money and these decisions are likely to bring prosperity or doom to a business. A company's future income depends on how much investment is made, in what type of assets, and how these assets add to the overall value of the company.
Capital budgeting is a phrase stringently connected to savings in fixed assets; here, the word capital refers to the fixed assets that are worn in invention, whereas budget is a plan that details projected cash inflows and outflows over some potential period. The following concepts and techniques are employed while analyzing investment decisions.
1. Interest rate formulas
2. Time Value of Money
3. Discounted Cash Flows
4. Net Present Value
5. Internal Rate of Return
Risk & Return
Investors, individual or institutional, invest their money with the expectations of earning a return on their investment. While investors wish and attempt to earn maximum return, they are constrained by risk. How the risks and returns are related and how do investors make a choice of their portfolios is important for investment decision making.
Following concepts and theories would be discussed while discussing the risk-return choices of the investor:
3. Portfolio Theory
4. Capital Asset Pricing Model