## Investment Decisions — Introduction
The investment decision is concerned with the optimum utilization of funds to maximize the wealth of the organization and, in turn, the wealth of its shareholders.
- Every rupee of capital raised bears a cost of capital (see the Cost of Capital chapter).
- Therefore each rupee must be invested prudently, which requires proper capital planning — done through capital budgeting.
### What Capital Budgeting Involves
1. Identification of investment projects that are strategic to the business's overall objectives.
2. Estimating and evaluating post-tax incremental cash flows for each investment proposal.
3. Selection of the proposal that maximizes the return to investors.
## Types of Capital Investment Decisions
Capital investment decisions are generally classified in two ways:
### A. On the basis of the Firm's Existence
- Replacement and Modernisation Decisions — replacing old assets / upgrading technology.
- Expansion Decisions — increasing capacity of existing lines of business.
- Diversification Decisions — entering new lines of business.
### B. On the basis of the Decision Situation
- Mutually Exclusive Decisions — accepting one project rules out the other(s).
- Accept–Reject Decisions — a project is judged independently on its own merit (accept if it clears the criterion).
- Contingent Decisions — one investment is dependent on the undertaking of another.