In the setting up of any firm or business, investment is one of the pre-requisites. In layman’s terms, investment is putting money into something with the hope of profit. More specifically, investment is the commitment of money or capital to the purchase of financial instruments or other assets so as to gain profitable returns in the form of interest or income.
In the setting up of any firm or business, a certain minimum amount of capital (both monetary and physical) is required to initiate the process. Even after the business has been set up, investment is still required to negate the effects of depreciation and to add to the capital stock. In fact, investment in the form of money capital is required in any step that the firm might undertake.
The investment decision (or capital budgeting) is one of the fundamental decisions of business management: Managers determine the investment value of the assets that a business enterprise has within its control or possession. These assets may be physical (such as buildings or machinery), intangible (such as patents, software, goodwill), or financial (stocks, bonds). Assets are used to produce streams of revenue that often are associated with particular costs or outflows. All together, the manager must determine whether the net present value of the investment to the enterprise is positive using the marginal cost of capital that is associated with the particular area of business.
The investment decisions are crucial in influencing the firm’s growth in the long run. The effects of investment decisions extend into the future and have to be endured for a longer period than the consequences of the current operating expenditure. A firm’s decision to invest in long term assets has decisive influence on the rate and direction of its growth. A wrong decision can prove disastrous for the continued survival of the firm; unwanted or unprofitable expansion of assets will result in heavy operating costs to the firm. On the other hand, inadequate investment in assets would make it difficult for the firm to compete successfully and maintain its market share