Page 7 - PowerPoint Presentation

THE FINANCING DECISION

Interaction between the finance and

investment decisions

• The financing decision normally takes place after a capital

investment appraisal, where the investment appraisal indicated that
a particular investment should be made (usually accompanied by a
positive net present value).

• The same is true in the case of a financing decision involving foreign
debt.

• The only exception is where there is a particular cheap form of
finance available and this form of finance is directly linked to the
particular investment (e.g. a favourable leasing option of a

particular asset).

• In this case the finance decision can influence the outcome of an

investment decision, because here the cheap finance and asset are
intricately linked.

• In such a case the favourable asset-specific finance can provide an

additional advantage, which may turn a capital-investment
decision’s negative net present value, into a positive.

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