Types of Capital Investment Decisions

## Types of Capital Investment Decisions

Capital investment decisions are classified on two bases.

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### Classification 1: Based on Firm's Existence

#### (i) Replacement Decisions

• Replace an asset whose economic life is over.
• Aim: Maintain operational efficiency.
• Also called Cost Reduction Decisions.
• Example: Replacing a 15-year-old lathe that breaks down frequently.

#### (ii) Modernisation Decisions

• Upgrade to a technologically advanced machine even before the old one wears out.
• Aim: Reduce cost, improve quality.
• Also called Cost Reduction Decisions.
• Example: Replacing working CNC machines with AI-driven machining centres.

#### (iii) Expansion Decisions

• Add production capacity to meet rising demand.
• Also called Revenue Expansion Decisions.
• Example: Adding a second production line when orders exceed current capacity.

#### (iv) Diversification Decisions

• Enter new products or new markets to spread risk.
• Also called Revenue Expansion Decisions.
• Example: A cement company setting up a ready-mix concrete business.

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### Classification 2: Based on Situation

#### (i) Mutually Exclusive Decisions

• Two or more proposals where accepting one automatically rejects the others.
• Example: Choosing between buying Machine A or Machine B for the same task.

#### (ii) Accept-Reject Decisions

• Independent proposals evaluated against a minimum required rate.
• Accept if: Return ≥ Required rate
• Reject if: Return < Required rate

#### (iii) Contingent Decisions

• Dependent proposals—one investment requires another.
• Example: Setting up a factory in a remote area also requires investing in roads and staff housing.

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