Types of Investment Decisions

Meaning of Investment Decision

Investment decisions concerned with the allocation of funds into different investment opportunities for the purpose of earning the highest possible return. It simply assists firms in selecting the right type of assets for deploying their funds. These decisions are taken by the investor or top-level managers who properly analyses each opportunity before investing any fund into them.

Types of Investment Decisions
Types of Investment Decisions

Various Types of Investment Decisions

Inventory investment

It includes decisions taken by the firm for the procurement of an adequate amount of raw materials. Maintaining the right stock of materials is important for ensuring the smooth functioning of the business. All expenses that a firm incurs on stock maintenance are treated in the category of investment. 

Replacement Investment

These decisions are related to the replacement of old or obsolete assets with new ones due to modernization. The firm decides which all fixed assets need to be replaced and what new assets to be purchased after replacing them.

Strategic Investment Expenditure

Strategic investment expenditure decisions are taken for improving the power of a firm in the market. The expenditure on these expenditures provides benefits in long term and does not yield immediate return.

Modernization Investment Expenditure

Firms incur this expenditure for upgrading their technology used in the production process. Decisions are taken for adopting the latest and better technology in place of the old one for increasing efficiency and lowering the overall cost. This is also known as a process of capital deepening. 

Expansion Investment

Expansion investment decisions are meant for expanding the size and production capacity of a firm due to the increase in demand. Here, the firm decides to extend its fixed assets for producing more products thereby enhancing its efficiency. Investment undertaken for expansion of firm size is also termed as capital widening.

Expansion Investment on New Business

These decisions are taken by organization for starting of a new business or to diversify its risk by starting a new line of production. Firm needs to purchase a new set of machinery for diversifying its business which requires a huge amount of investment.