Revision NotesPast Papers
A LevelBusinessAQARevision Notes7. Analysing the Strategic Position of a Business (A Level)7.5 Investment AppraisalFactors Influencing Investment Decisions

Factors Influencing Investment Decisions (AQA A Level Business): Revision Note

Exam code: 7132

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Updated on

Investment criteria

  • Businesses consider a range of criteria when deciding whether to invest in, for example, capital equipment, training or R&D

Common investment criteria

Flowchart showing common investment criteria with factors: availability of finance, cash flow, market demand, tax breaks, and expected profits
Common investment criteria include the expected cost of an investment compared to its cost and the availability and cost of finance

  1. Expected profits compared to costs

    • Businesses ask whether an investment is likely to earn more money back than it costs

      • They compare how much extra profit a project should bring to decide if it’s worth doing

  2. Availability and cost of finance

    • They look at how easy and cheap it is to borrow money

    • Low interest rates can be an incentive to take out loans for big purchases

  3. Cash flow and internal funds

    • They consider how much spare cash is available to fund or repay borrowing used to fund an investment

      • Even if borrowing is possible, they won’t start a project if it leaves them unable to pay day-to-day bills

  4. Government tax breaks and grants

    • Government schemes, such as tax credits for research spending or grants for new machinery, cut the cost of an investment and make them more attractive.

  5. Market demand and competitive pressure

    • Businesses invest when customers are asking for new products or when rivals are upgrading

      • If demand is rising or competitors are innovating, businesses must spend to keep up

Non-financial factors

  • Although quantitative investment criteria usually drive investment decisions, businesses consider a range of non-financial factors, too

Non-financial factors affecting investment decisions

Factor

Explanation

Example

Technological change

  • Companies invest to keep up with new technology that boosts efficiency or quality

  • Jaguar Land Rover fitted advanced welding robots at its Solihull plant to build cars faster and with fewer defects

Regulatory and legal environment

  • New laws or standards may force firms to upgrade systems or processes to stay compliant

  • After GDPR began in 2018, British Airways spent over £50 million on IT security and staff training to protect customer data

Social and consumer trends

  • Changes in customer behaviour lead businesses to invest in new channels or products

  • Marks & Spencer expanded its website, mobile app and click-and-collect lockers to meet growing online shopping demand

Environmental and sustainability goals

  • Climate targets and green regulations push businesses to invest in clean technology projects

  • Drax Group recently invested £2 billion in bioenergy carbon capture at its North Yorkshire power station to cut CO₂ emissions

Availability of skilled labour

  • A shortage of key skills encourages businesses to fund training programmes or locate where talent is plentiful

  • Rolls-Royce has partnered with local colleges and universities to create aerospace apprenticeships, ensuring a steady stream of skilled engineers

Risk and uncertainty

  • When businesses decide whether to invest in a new project, like buying machinery, launching a product or building a factory, they weigh up both risk and uncertainty

    • Risk is where a business can estimate possible outcomes and their probabilities

    • Uncertainty is where they cannot make these estimates

Impacts of risk and uncertainty on investment decisions

Type

Factors

How it affects investment decisions

Risk

  • Price fluctuations

    • E.g. raw material costs may rise

  • Demand swings

    • E.g. sales might fall if customers buy less

  • Firms only invest if they expect extra profit to cover possible cost increases, or they add a safety margin in their plans

  • Companies look for very strong sales forecasts before agreeing to large spends, or they start with a small trial project

Uncertainty

  • Future Regulations

    • E.g. new laws or standards could change)

  • Technological Change

    • E.g. new technology may make equipment obsolete

  • Economic Outlook

    • E.g. whether the economy will grow

  • Businesses often delay big projects until rules are clear, or they split them into stages so they can adjust plans later

  • Managers may wait to see which technology wins out, choose machines that are easy to upgrade or lease instead of buying outright

  • Firms phase spending by doing part of the project now and adding more later if the economy improves to avoid huge up-front risk

You've read 0 of your 5 free revision notes this week

Unlock more, it's free!

Join the 100,000+ Students that ❤️ Save My Exams

the (exam) results speak for themselves:

    Did this page help you?

    Previous:Investment Appraisal MethodsNext:Choosing an Appropriate Market
    Author
    Reviewer
    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

    Steve Vorster

    Reviewer: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.