Are you Account and Finance Manager of Company who is responsible to spend money on capital expenditure or big asset buying or development or making same big assets, then this content will be useful for you. If you are reading it for academic purpose, then also sufficient because you are student and student must be curious to know the detail of each topic.
Following are the factors influencing capital expenditure decisions
1st Factor : Resource Limit
Your Resource Limit affects your capital expenditure decisions. For example, you want to buy a machine of Rs. 10 Lakh but your total capital resource and debt resource is Rs. 5 Lakh, you will be unable to buy same capital expenditure. Yes, we new and new ideas like demanding venture capital, you can boost this limit
2nd Factor : Buy Back Money
Every manager of company also thinks like a professional investor. Will same capital expenditure will fast buy back the money because professional investor wants to play with home money. So, its buy back of principle is far from other projects, manager can change the decision to invest in it. It will prefer to buy other projects.
3rd Factor : Return on Capital Expenditure
When we spend money on capital expenditure, we get the fixed asset. So, manager will be responsible to know advance return on its investment before investment. If this is giving very low rate, it will affect the decision of manager and manager may decide not to buy or buy less or do less capital expenditure in same project
4th Factor : Knowledge of Technical Aspects of Capital Expenditure
Capital expenditure decisions depends also the knowledge of technical aspects of same capital expenditure. For example, you have bought a machine for your company need but after technical advice, you need to buy 4 new machines to operate this machine. So, it may be out of your budget. So, instead buying this new 4 machines, you may plan to sell this and buy other advance technological machine.
5th Factor : Law Effect
Law can effect your capital expenditure decision. For example, you are starting a factory in any area where, there is not allow the machines which you will install, you may cancel this project due to legal barrier.
6th Factor : Compare Different Capital Expenditure
Whether, we buy or manufacture. Whether we rent or buy. These type of decisions will depends on the profitability and buy back of our own money. So, decision will change as per positive results in other project. If overall profitability is in manufacturing, we can leave the decision of buying same.
Reference
Financial Management eBook
