How you can apply the Capital Investment Decisions process and concept of 'risk and return' in your research study relating to financial analysis. What are the example of capital investment techniques and which techniques are highly reliable. How you apply those concept in your research?

Introduction

Capital investments are purposefully made to boost a company's business objectives. It is referred to acquisition of capital or fixed assets that are productive for a long duration (Agar 2005). From the financial aspect, capital investment decisions involve capital budgeting which aims to allot funds of the company in an effective way to ensure that it receives best possible returns. The key aspects of the decision involve the assessment of the proposed investment or project and allocation of the capital based on the requirements. In this report, the effect of capital investment decision process, the concept of risk and return on financial analysis and the reliable technique adopted are discussed.

Capital Investment Decision Process

The objective of a company undertaking capital investment decision is wealth maximization for shareholders through asset acquisition and yield profits. It is the requirement of the management to determine which investment would provide positive cash flow based on the resource availability and on the basis of priority related to value generation.  The process is regulated by rating the investment options. The capital investment decisions are subject to several constraints, especially the funds available which restrict its choice over various investment options. However, if the company's debt increases, the debt-equity ratio also increases which impacts its ability to mobilise funds through debts in the future.

Concept of Risk and Return

Capital investment decisions of a company are based on the risk-return patterns.  Hence, investors are highly concerned about the suitable risk and return measures adopted.  Investment decisions are prone to two types of risks – systematic and unsystematic risks. Systematic risk is external and uncontrollable which influences investments (Bialowolski & Weziak-Bialowolska 2014). It is linked to the macro-economic, social, political and legal environments of the company. Unsystematic risk arises from the internal environment of the organization and it specific to the industry such as employee behaviour, management policies and demand for the products.

Companies tend to invest in physical assets due to the higher return when compared to financial assets. Due to changes in the business environments, returns tend to fluctuate which in turn increases the risks associated with it. Market beta (β) is used to determine the extent of fluctuations in security with respect to the returns on the market portfolio. According to the Capital Asset Pricing Model (CAPM), the earnings from a security are fixed and steady, its risk is zero and any fluctuations are considered risky (Zhang 2017). As per this model, the securities with higher systematic risk will offer higher return than the securities with lower systematic risk.

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