CHAPTER 8 ANALYSIS OF INVESTMENT DECISIONS. The decision to invest resources is one of the key drivers of the business financial system, as we established in Chapter 2. Sound investments that implement well-founded strategies are essential to creating shareholder value | 9 27 01 11 28 AM Pagy 255 CHAPTER 8 ANALYSIS OF INVESTMENT DECISIONS The decision to invest resources is one of the key drivers of the business financial system as we established in Chapter 2. Sound investments that implement well-founded strategies are essential to creating shareholder value and they must be analyzed both in a proper context and with sound analytical methods. Whether the decision involves committing resources to new facilities a research and development project a marketing program additional working capital an acquisition or investing in a financial instrument an economic trade-off must be made between the resources expended now and the expectation of future cash benefits to be obtained. Analyzing this trade-off is essentially a valuation process that makes an economic assessment of a combination of positive and negative cash flow patterns. The task is difficult by nature because it deals with future conditions subject to uncertainties and risks yet this basic valuation principle is common to all investments large and small. In this chapter we ll examine in some detail both the key conceptual and practical aspects of investment decisions using the analytical techniques described in Chapter 7. In Chapters 9 and 10 we ll address the related issues of financing costs and the choice among financing alternatives. In Chapters 11 and 12 we ll expand on these concepts and demonstrate how the process applies to valuing a business and to the creation of shareholder value. From time to time we ll introduce applicable portions of managerial economics and financial theory. In keeping with the scope of this book however we ll avoid the esoteric in favor of the practical and useful. At the end of each chapter we ll summarize as before the key conceptual issues underlying the analytical approaches covered both as a reminder and as a guide for the interested reader in exploring the references listed. The analysis of decisions about new .
