CHAPTER 12 Capital investment 503Still, there are some positive signs for the future. During its 10th Anniversary year, Docklands Studios
enjoyed its busiest 12 months since the government buyback. In 2014, the studios hosted a wide variety
of projects — international and local feature films, TV miniseries, live-audience programming, TV com-
mercials and fashion shows — and the Australian feature films, Sucker, Oddball and The Dressmaker,
were all made at the studios in that year.
Source: Quinn, K 2013, ‘Film studio creates more lights, camera, action’, Sydney Morning Herald, 25 February,
http://www.smh.com.au/entertainment/movies/film-studio-attracts-more-lights-camera-action-20130224-2eznm.html.The process of decision making
Just as funds are normally a scarce and valuable resource in our personal lives, so too they are for busi-
ness entities. Hence, entities that are successful in the long term make investment decisions very care-
fully and follow established decision-support procedures. At any one time, most entities will have many
projects or investments available to them, and the decision as to which projects to invest in is based on
an assessment of the attractiveness of the returns relative to the risk.
The steps involved in making an investment decision are as follows.
- Identify all the investment alternatives available at the time.
- Select a decision-support tool and set the decision rule.
- Collect the data necessary to make the decision.
- Analyse the data.
- Interpret the results in relation to the decision rule.
- Make the decision.
After making the investment decision, the next step is often to arrange finance (the financing decision)
and start the planning and physical implementation of the project or investment.
The investment alternatives available to any entity at any one time normally fit into one of three
categories:
- new investments to increase revenue
- new technology to decrease costs
- replacement of old assets as they wear out.
One example of a new investment to increase revenue is JB Hi-Fi Ltd’s investment in new HOME
stores. At the time of writing, JB Hi-Fi Ltd operates 187 stores across Australia and New Zealand. In
2016, the entity expects to open six new stores. At 30 June 2015, they had 43 JB Hi-Fi HOME stores,
with four new JB Hi-Fi HOME stores opened and 17 JB Hi-Fi stores converted to JB Hi-Fi HOME
stores during 2015. For the Qantas Group, a large proportion of its capital investment projects relate
to the purchase or lease of new aircraft to replace old worn-out aircraft. For small entities, investment
decisions can relate to moving to larger premises, acquiring a new machine or investing in a vehicle
fleet.
Almost all entities make investments to decrease costs in today’s environment of rapidly developing
technology. Many entities invest in computer systems and link to the internet or invest in cloud com-
puting; manufacturing entities invest in new plant and machinery; and retailers invest in major computer
networks to streamline ordering and stock control, bill payments and income control. Institutions such
as universities have spent millions of dollars in the last few years on computer technology to streamline
and integrate student academic and financial records, and teaching materials. All of these investments are
made with the intent of making processes more effective and more efficient.
Finally, entities make investments to replace assets that have come to, or are nearing, the end of their
effective lives. Examples are the replacement of computers, trucks, aircraft, passenger vehicles, trains,
ships, factory machinery, tractors and farm machinery, and furniture and fittings. It is often the case that
the new assets incorporate new technology, but this is a bonus when the primary motivation is merely to
replace older worn-out assets.