Investment decision is related to investment of firm’s funds in long-term assets to earn the highest possible returns is called long term investment or capital budgeting decisions.
The factors affecting long-term investment decisions are:
(i) Cash Flows of the Project: The cash flows in the form of cash receipts and cash payments from each investment proposal should be carefully analysed before considering a capital budgeting decision.
(ii) Rate of Return: The expected rate of return over the investment proposal and the risk involved should be analysed and that proposal should be accepted which contains the least risk and cost but maximum ROI.
(iii) Investment Criteria Involved: The amount of investment, cash flows, interest rate, tax benefits, rate of returns, cost of financing should be kept in mind as the criteria for selecting the best decision after their evaluation on these points.