The Factors Affecting Cameron Balloons Investment Decisions

the businesses views the decision that they take when making an investment and the decisions which will affect the businesses overall objectives.Business confidence - this is one of the most vital influences on investment decisions. Business owners and managers should take some time to view their decisions when making an investment. Business confidence is affected by some factors such as:* Rivals investment activities* Interest rates* Unemployment levels* Success of previous investments* Inflation rates* Future order levelsEthical considerations - the number of businesses are increasing who want to be good corporate citizens.

For this businesses will be responsible socially and they will need to consider the views of all stakeholders.The capital rationing will not affect Cameron Balloons much because the capital they are planning to use for investment is �200 to �125,000. Cameron Balloons need to consider inflation during making decisions for their investments because they will need to look at time value of the money. Cameron Balloons does pay tax and by making investments their tax rates will change, which is another factor which they will need to consider.

Cameron Balloons will also need to take in account human relations and how it will the investment affect them. Overall objectives of business is very important and for Cameron Balloons to maintain their growth they will need to look at their corporate strategy in detail when making their investment and the benefits or drawbacks it will have in objectives and aims of the business. The business confidence is vital for making a investment and Cameron Balloons will need to make a detailed research on some facts such as interest rates to make a fine decision. Ethical

considerations is also important because Cameron Balloons will want to be a good citizen and for this they will need to take views of their stakeholders which will also bring a good and friendly business image to them.Other costs which are associated with an investment which needs to be consideredThere are also some other costs which Cameron Balloons need to consider when making an investment decision.

These costs are as follows:* Capital Outlay - this cost is when setting up an investment project before it is actually operational. This cost may be very high and make a strain on Cameron Balloons financial resources. If the capital outlay is considered to be high then it will have a pressure on the ultimate decision for the investment.* Operating Costs - these costs are when the investment is set up and operating and has additional costs during its operation. These costs are considered as on going costs for Cameron Balloons and they will need to use this when calculating their net cash flows. Cameron Balloons can take the operating costs and deduct from the estimated future revenues and can use this when appraising an investment.

* Sunk Costs - these costs are known as the capital put in an investment and cannot be recovered. It is the money used to set up the investment project. For example if Cameron Balloons does not have and return or profit made from the investment project then the money used to set up will be the sunk costs.* General Business Costs - when using investment appraisal methods it does not cover looking at any other costs which are not related to the investment

projects. If the costs are not linked with the investment project then Cameron Balloons should not take it into account.

These costs are vital to be considered by Cameron Balloons when looking at investment projects because it will give them estimation of what the investment will cost them during setting up, when operating, costs connected with the investment and costs which may not be recovered.Other alternatives of investment to be financedThere are different options for a business to finance their investments. For example if the business is a plc they have the option to use the share capital or loan capital for their investments, but there are benefits and drawbacks for businesses to use some of these methods. Cameron Balloons may decide to use leasing as a source of finance for their investment project.Leasing - provides the occasion of renting an asset. If Cameron Balloons cannot meet the expense of an asset such as property, machinery or vehicles outright then they may have the chance to lease.

This is also a good way of acquiring such resources as they may be required for simply short period of time. Leasing group also covers the maintenance and repair expenses. If the leasing is for long periods of time this may be costly for the Cameron Balloons. There are various types of leasing and most frequent types of leasing are Operating Lease and Finance Lease.

* Operating Lease - this is when the business pays for the use of the asset for particular period of time and then the asset is returned to the leasing company.* Finance Lease - this takes place when the business leases the equipment and at

the end of leasing they may have the option of purchasing the equipment.Leasing is a major source of finance and by leasing Cameron Balloons can obtain assets to keep their business operating and keep their cash flow tight. There are some advantages of leasing.

A business can put aside money by leasing because they do not have to pay the full sum for the asset and it is only paid for a fixed period of time. Interest rates are also fixed for leasing and this will ease the cash flow of the Cameron Balloons and they will know how much they will need to pay each month. If a Cameron Balloons prefers they may pay over a long period of time which will also ease the cash flow and they may wish match the payments to their income.Cameron Balloons may decide to use leasing if they have poor cash flow, or if the machines are only needed for certain amount of period, but leasing over long periods of time will be more expensive and generally other businesses sell their assets and lease them back.

The drawback of leasing is that the business does not own the asset.Problems of appraisal being based on estimates and how a sensitivity analysis could be used carry out the NPV calculations using a different interest rate eg 5% or 15% and see how it may change the decisions.The problems of appraisal being based on estimates are that a business cannot guarantee the figures and it is only estimation which means that the figures and costs will not be definite. Sensitivity analyses could be used to anlayse the effects of changes

in some of the variables that control investment profits.

If businesses use sensitivity analyses it will allow them to ask themselves 'What if' questions so they can look at other risk which may take place. By sensitivity analyses a business can use the NVP method and look at the estimated project by using variety of interest rates and evaluate them. Sensitivity analyses are actually used to figure out how sensitive the returns are on investments and the expected costs and revenues on investment projects. By using sensitivity analyses the business can see if the investment project is still practical to carry on with if there is a 25% fall in net cash flow. The difference in interest rates will bring up different estimations and costs which will mean there will be a difference in net cash flows and because of this a business will need to consider different interest rates and make a suitable decision on their investment project.

Different interest rates will give dissimilar results on NVP and Cameron Balloons should make sure there is a positive change in their net cash flow and to do this a sensitivity analyses is vital.Draw clear conclusion by making a recommendation to Cameron Balloons backed up by your evidence.By looking at different methods of investment appraisal Cameron Balloons can make a decision between the two investment projects and choose which one is better for their business.The result of payback calculation gives the figures below and the investment with shortest payback period is always the best one to choose in this method.

In this case Machine 1 should be chosen to be invested in at this step.Machine 1

Payback Period:36 x 40, 000 = 28.8 = 2 years 5 months50, 000Machine 2 Payback Period:48 x 125,000 = 42.8 = 3 years140,000The Average Rate of Return (ARR) will determine how profitable the investment project is and if the results are higher it will mean it is better to invest in.

The process will also allow Cameron Balloons to compare the profit made by the investment with the actual cost of it.The ARR for Machines are:The ARR for Machine 1: 12.5The ARR for Machine 2: 4.8In this situation Cameron Balloons should choose to invest again in Machine 1 because the ARR of Machine 1 is 12.

5 which are higher and better to invest in.The ROCE calculations clearly identifies that it is better to invest in machine 1 with 62.5% and I recommend that Cameron Balloons should invest in this project. Below are the results of ROCE calculations and machine 2 has a lower percentage with 24%. The higher the percentage is the more valuable it is to invest in that investment project.The ROCE for Cameron BalloonsMachine 125,000X 100 = 62.

5%40,000The ROCE for Machine 1 is 62.5%Machine 230,000X 100 = 24%125, 000The ROCE for Machine 2 is 24%Below is the Net Present Value calculation table which undoubtedly shows that the net income from machine 1 is more imperative for a business to invest in. The net income of machine 2 is lower which is not valuable as machine 1. I recommend that Cameron Balloons should invest in Machine 1 which has a better net present value.