Wednesday, January 13, 2010

(123)---TYPES OF INVESTMENT DECISIONS (2)

Types of Investment Decisions (2)

Another useful way of classify investments is as follows
  • Mutually exclusive investment
  • Independent investment
  • Contingent investment


Mutually exclusive investment

Mutually exclusive investments serve the same purpose and compete with each other. If one investment is undertaken, others will have to be excluded. A company may, for example, either use a more labor intensive, semi automatic machine, or employ a more capital intensive, highly automatic machine for production. Choosing the semi-automatic machine precludes the acceptance of the highly automatic machine.


Independent investment

Independent investments serve different purposes and do not compete with each other. For example, a heavy engineering company may be considering expansion of its plant capacity to manufacture additional excavators and addition of new production facilities to manufacture a new product light commercial vehicles. Depending on their profitability and availability of funds, the company can undertake both investments.


Contingent investment

Contingent investments are dependent projects; the choice of one investment necessitates undertaking one or more other investment. For example, if a company decides to build a factory in a remote, backward area, it may have to invest in houses, roads, hospitals, etc. For employees to attract the work force thus, building of factory also requires investment in facilities for employees. The total expenditure will be treated as one single investment.

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