Some investments, however, defy financial analysis; an example of this may be seen in charitable donations, which provide intangible benefits that financial mangers alone cannot evaluate.
It may be argued that investment decisions fall into one of three basic decision categories:
Accept or reject a single investment proposal
Choose one competing investment over another
Capital rationing ? with this particular category, the limited investment pool is active deciding which projects among many should be chosen.
Whilst each corporation uses its own criteria to ration its limited resources, the major tools are:
Payback period
Net present value
Payback period method ? many companies believe that the best way to judge investments is to calculate the amount of time it takes to recover their investments.
Analysts can easily calculate paybacks and make simple acceptance or reduction decisions based on a necessary payback period. Those projects that come close to the mark are accepted, those falling short are rejected. For example, the managers of a small company may believe that all energy and labour saving devices should have a three-year payback and that all new machinery must have an eight-year payback. Additionally, research projects should pay back in ten years. Those requirements are based on management's judgements, experience, and level of risk.
By accepting projects with longer paybacks, management accepts more risk. The further out an investment's payback, the more uncertain and risky it is. Payback criteria are desirable because they are easy to use, calculate and understand; however they ignore the timing of cash flows and accordingly the time value of money. Projects with vastly different cash flows can have the same payback period.
Another disadvantage of using payback is that it ignores the cash flows received after the payback.
Net present value methods
The same method used for valuing the cash flows of bonds and stocks is also used to value projects. It is the most accurate and most correct method. The further in the future a dollar is received the greater the uncertainty that it will be received, referred to as risk, and the greater the loss of opportunity to use those funds, referred to as opportunity cost. Accordingly cash flows received in the future will be discounted more steeply depending on the riskiness of the project.
The way a business wishes to fund itself are financing decisions independent of investment decisions.
In my own experience, I have only ever used the payback method, along with my fellow business colleagues, perhaps because this has always been easier to understand and use and calculate. This served us well but caused frequent conflicts between operations, marketing and finance, for understandable reasons.
In summary, whereas most companies may continue to use the payback method due to the aforementioned reasons, it is well worth noting that another option is there and, especially for the financial side of the business, gives a very interesting option.
Many people assume that Forex is another get rich scheme. However the foreign currencies exchange market should be consider as a long term investment. One should start with a business plan and should in essence think of the investment as running a business. What does this mean? Consider the act of opening a local business near your house. For our example, I will use a coffee shop. You should treat using an investment vehicle such as Forex much like opening a coffee shop near your house. Many make the mistake of investing money that they might need a year down the road. Money that is to be invested should not be any amount that you will need anytime soon. Once its invested it should be considered for the long term. The first thing to be done with starting that comic book store is the business plan. It tells where the store will be, who the target market it, and how much is projected in profit. Investment plans should be done the same way. It should lay out where the money will be and for how long. When doing your investment plan you must consider a few things. First of all where is the economy now, and secondly where do you expect it to be the future. Your plan should also include what steps have to happen for the future to fall into place. Don't abandon your plan in mid-stride. You wouldn't close your coffee store if, on one particular day, no one bought coffee. Circumstances can change day-to-day. Your plan should be long-term, and be executed over the long term. If the reasons you chose your plan are still true, stick with it. Short term fluctuations may cause you to experience some panic if you get a loss one day, but selling a currency at a low rate is a sure-fire way to lock in your loss. When investing in this market remember that you do not have to only stick with one plan. Feel free to diversify your portfolio. You should stick to your first plan but feel free to keep investing in other currencies. This is not a one track issue. You can in fact have several plans going at one time. In conclusion remember to treat your Forex as a business. Use a business plan, look at the long time goal of your business plan, and donat pull out when it gets rocky. Keep checks over your long term goals that you set in your investment plan. Be careful, a best of luck!
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