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All investment decisions involve a certain degree of risk and uncertainty. How can a manager reduce...

All investment decisions involve a certain degree of risk and uncertainty. How can a manager reduce the level of risk and uncertainty when making CapEx decision? In your response explain how Economic Value Added (EVA) may help reduce this uncertainty.

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Answer #1

Capital Expenditure or Investment involves huge amount of investment for purchase of resources which include heavy equipment or machinery, facilities and construction projects etc. The more the investment, the more will be the risk considering how whether the returns will surpass the capital expenses and also finance the operational expenses that are currently being incurred.

Economic Value Added(EVA) determines the firm's financial position with respect to the firm's economic profit which is the revenues minus the capital expenses which means the revenues cover for the capital investment which is invested by the shareholders. This ensures that the minimum shareholders investment is returned thus providing an understanding of the risk and return.

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