BU1002 Lecture Notes - Lecture 9: Dividend Imputation, Payback Period, Decision Rule
14 Jun 2018
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Nature and Scope of Investment Decisions
Investment decisions
• Often involve large amounts of resources
• Involve a risk and uncertainty
• Often span over long periods of time
• Normally require a relatively large cash outlay
• Are often more difficult to reverse
• Must be made on a basis of best available data
Risk and Decision Making
• Risk in finance is defined as measurable variation in outcomes
• Uncertainty - is the unmeasurable variation in outcomes
• Risk can be measured with some degree of confidence when the same decision is taken
many times
• Thereafter, the decision maker will have a better understanding of how expected outcomes
may vary
The process of decision making
1. Identify all current available investments alternatives
2. Select a decision-support tool and set the decision rule
3. Collect the data necessary to make the decision
4. Analyse the data
5. Interpret the results in relation to the decision rule
6. Make the decision
• Common categories of investment alternatives
o New investments to increase revenue
o New technology to decrease costs
o Replacement of old assets as they wear out
• Almost all entities make investments to decrease cost in todays environment of rapidly
developing technology
• Investments are made with the intent of making processes more effective and more efficient
Investment Decision Tools
• Finance tools
o Accounting rate of return
o Payback period
o Net present value
o Internal rate of return
Practical issues in making investment decisions
1. Collecting data
a. Costs and revenues may not be easy to determine
2. Taxation effects
a. Company tax rate currently 30%
b. The dividend imputation scheme making the latter even more complicated
3. Finance
a. Some investments look good on paper but may have trouble attracting finance from
banks or venture capitalists
4. Human resource
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Must be made on a basis of best available data. Risk in finance is defined as measurable variation in outcomes. Uncertainty - is the unmeasurable variation in outcomes. Risk can be measured with some degree of confidence when the same decision is taken many times. Thereafter, the decision maker will have a better understanding of how expected outcomes may vary. Select a decision-support tool and set the decision rule. Collect the data necessary to make the decision. Interpret the results in relation to the decision rule: make the decision. Replacement of old assets as they wear out. Almost all entities make investments to decrease cost in todays environment of rapidly developing technology. Investments are made with the intent of making processes more effective and more efficient. Costs and revenues may not be easy to determine. The dividend imputation scheme making the latter even more complicated.
