Contents

1. Introduction.........................................................................................................................................1
1.1. Objective of the Term Paper:.......................................................................................................3
1.1.1. General Objectives of Term Paper.......................................................................................3
1.1.2. Specific Objectives of Term Paper........................................................................................3
1.2. Methodology...............................................................................................................................3
2. Body.....................................................................................................................................................3
2.1. SWOT Analysis.............................................................................................................................6
3. Conclusion...........................................................................................................................................7
Reference....................................................................................................................................................8
 1. Introduction

One of the most important strategic business decisions is in respect of the investment of funds.
As capital investment plays a vital role in the existence of one’s business as it is one of the
engines of the day to day running of an organization that leads to success. The goal of
investing is not just to earn profit in a short span of time but to invest funds expecting a
higher return, as investing requires scrutiny. However, people in the society are having a
hard time to think how to invest their funds to achieve the desired outcome where in fact
they do not know how to invest wisely their capital.

Capital investment decision is defined as the process by which firms determine how to invest
their capital (Emmanuel, Harris & Komakech, 2010; Bakke & Whited, 2010; Gervais, 2009).
This process includes decisions in the investment to new projects, reassessment of the
amount of capital that has already been invested in existing projects, allocation and
rationing of capital across divisions, acquisition of other firms, among others. The essence
of capital budgeting process is definitive of the size of a firm’s real assets, which are
responsible in the generation of cash flows that determine a firm’s profitability, value, and
viability (Viviers & Cohen, 2011; Okafor, 2010; Dayananda, 2002). Hence, capital investment
decisions involve a company making decisions about large investment outlays in return for a
stream of benefits in future years (Bierman Jr & Smidt, 2012; Levy & Sarnat, 1994;
Northcott, 1992).

Financing decisions refer to the decisions that companies need to take regarding what proportion
of equity and debt capital to have in their capital structure. This plays a very important role vis-a-
vis financing its assets, investment-related decisions, and shareholder value creation. An integral
part of financial decisions is the consideration of the cost of capital, which companies must take
into account. For any investment worth undertaking, the expected return on capital must be
greater than the cost of capital i.e. weighted average cost of capital (WACC). Further, the cost of
capital is an important ingredient in the valuation of a company by investors.

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The financing decision seeks to optimize the WACC by looking at a company’s capital structure,
specifically the cost of equity and the cost of debt. If a company wants to create value for
shareholders, it needs to ensure that it’s ROIC (Return on Invested Capital) is greater than the
WACC. As part of financing decisions, companies aim to minimize their cost of funding while
maintaining a stable credit rating and the ability to finance new projects.

Several studies highlighted capital budgeting decisions to possess distinguishing activities

that delineates future benefits over time (Dimov & Gedajlovic, 2010; Denison, 2009;
McNichols & Stubben, 2008; Agarwal & Taffler, 2008; Anderson & Garcia‐Feijóo, 2006).
This is why investment decisions must be a subject of analysis of current and future risks
that are fundamentally responsible in some changes of investment decisions (Arrow &
Lind, 2014), since these are strategic in nature and may improve the strategic position of the
company for the foreseeable future if addressed properly. Basically, risk is unavoidable,
thus requires personal managerial conviction in the part of the entrepreneur.

Making a capital investment decision is one of the most important policy decisions that a
firm makes (Bierman Jr & Smidt, 2012; Nazir & Afza, 2009; Pike & Neale, 2006), given
that a firm that does not usually invest in long-term investment projects since it does not
maximize stakeholders investment interests and wealth for a desirable period (Denis & Sibilkov,
2010; Zellweger, 2007; Kor & Mahoney, 2005). Because of this barrier, there is a need to
do optimal decisions in capital investment with the primary intention of optimizing a
firm’s main objective –maximizing the shareholders’ wealth – and also help the firm to
remain competitive in its growth and expansion. These decisions are some of the integral parts
of corporate financial management and corporate governance.

By considering the above concepts and problems this paper seeks to examine the practices on
capital investment decisions, financing and its problem in case of Dashen brewery share
company.

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 1.1. Objective of the Term Paper:

1.1.1. General Objectives of Term Paper

The general objective of this study is to Assess Capital investment decision, financing and its
problem in case of Dashen Beery Share Company.

1.1.2. Specific Objectives of Term Paper

 To examine the internal Capital investment decision and financing in case of Dashen beery
share company
 To examine the problem of investment decision and financing in case of Dashen beery
share company

1.2. Methodology
The methods adopted to accomplish this term paper are:-

Literature review on the subject matter;

A comprehensive literature review is made to understand the subject matter by survey of

textbooks, academic journals and research papers.

Empirical review

Secondary data were collected from various secondary data sources. These sources were
including journal articles, manuals from books, newsletters, and reports.

2. Body
Various previous studies related to the topic under discussion have been assessed, studied
and presented in summarized manner in this section as follows.

An investment is any vehicle into which funds can be placed with the expectation that will
generate positive income and/or their value will be preserved or increased ( Gitman and Joehnk,
1996). It is a present sacrifice for future benefit. Individuals, firms and governments all are
regularly in the position of deciding whether or not to invest, and how to choose among the

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options available. An individual might have to decide whether to buy a bond, plant a seed, or
undertake a course of training; a firm whether to purchase a machine or construct a building; a
government whether or not to erect a dam. Under the heading of investment decision
criteria, Economists have addressed the problem of how to rationally choose in such situations
involving a tradeoff between present and future (Hishleifer, 1985).

Different scholars in the field of corporate finance, Operation management, economics,

etc, divide investment decisions into many types. Some scholars divide into two, others into
three and so on. For example, according to (Mauer and Ott, 1995, p.581), managers of firms
and public institutions make two types of investment decisions: expansion investment in new
plant or equipment; and replacement of assets in place with new ones. Expansion investments are
typically characterized by a large initial outlay followed by a stream of uncertain future benefits.
In contrast, replacement investment decisions usually entail determining the best time to replace
a deteriorating asset with a new one that will produce the same product or service. Examples of
such decisions abound in every organization and industry , including replacement of computers,
aircraft, automobiles, trucks, photocopiers, and a large variety of other assets. And
according to Brigham (1995), firms generally categorize projects into: replacement to
maintain business, replacement to reduce cost, expanding the existing market or product,
expansion into new products or markets, safety and environmental, and others like Seitz

(1990), however, has classified capital investment into: (1) Physical, (2) monetary or financial,
or (3) Intangible.

According to him, physical assets such as factories, machineries, computers, airplanes and
airways are physical assets that qualify as capital investments. Monetary assets are claims
against some other party for monetary payments such as saving accounts, bonds, and stocks.
Intangible investments are neither physical nor claims for payment by some other party and
include a training program given to employees, and franchise.

Capital investments are carried out to achieve different objectives. Seitz (1990) has
identified the following objectives: (1) to improve efficiency (i.e. reduce cost), (2) to

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increase production capacity in the existing product line, and (3) to result in a new product
line. Bearely and et al. (1984) stated that the object of

investment, or capital budgeting, decision is to find real assets that are worth more than they
cost. Whatever the type and objectives of investment, Gitman, and Joehnk (1996) explained
that investment made by both individual investors and business firms provide the
mechanism needed to allow our economy to grow and develop.

The tern uncertainty and risk are used interchangeably to describe an investment whose profit is
not known in advance with absolute certainty, but for which an array of alternative outcomes and
their probabilities are known (Levy and Sarnat, 1993, p.216). Each investment options have
different types of risks. Risks are inevitable and associated with all investment alternatives
even if their types and degrees are different. Investment alternatives (usually called Projects)
might be exposed to business, and financial risks at different degrees.

Some investment alternatives are highly exposed to business risk while others to financial risks
or to both at the same time.

Risk is inherent in almost every business decisions. More so in capital budgeting decisions
as they involve costs and benefits extending over a long period of time during which
many things can change in unanticipated ways (Chandra, 1980). Risks arise from different
sources such as the demand for the firm’s products might decline; the selling price might
decrease, the price of the inputs might increase and inputs like raw materials might be
exhausted, fixed costs might increase, the environmental control standards may be
tightened, change in exchange rate and inflation may adversely influences the firm.

With uncertainty, many alternative sequences of cash flows could occur if an investment
were accepted. The decision maker does not know in advance which sequence will actually
occur. The goals, both under certainty and uncertainty, are the same; the investor would like to
know the amount by which the market value of the firm would change if the investment were
accepted. However, the estimation process is much more complex under uncertainty than under
certainty (Bierman and Smids, 1988, p.387). Theoretically, most of the time, it is assumed that
the acceptance of any investment proposal would not alter the business-risk complexion

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of the firm as perceived by suppliers of capital and this assumption allows to use a single
required rate of return in deciding which capital projects a firm should select. Many scholars like
Horne and Wacho (1995), however, realized that this is not the case in real world.

2.1. SWOT Analysis

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 3. Conclusion
Ethiopian corporates use investment and financing decisions criteria only at the time of
initial investment when they are forced by other bodies such as banks that extend loans to them.
In such case, it was found that they use NPV, IRR, PI or PBP or their combination. The
study revealed that companies in Ethiopia evaluate their projects almost entirely on the basis
of the pure rate of return. However, the study also found that risk assessment and adjustment
techniques such as sensitivity analysis, simulation analysis and decision tree analysis are
rarely used in Ethiopia. Accordingly, the most and widely employed risk assessment technique
was sensitivity analysis and the most common methods for risk adjustment are shortening
of the payback period.

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 Reference

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