Decision making for a specific purpose
When making decisions on investments, factors affecting these decisions need to be compared with factors applicable to other investment options. For instance, the table below provides a format that compares the types of investments in very general terms.
E.g. If capital growth is the aim, this indicates that property and shares asset classes fulfil the first criteria. If there is no time frame then both these options are still viable however, they differ in the degree of risk which is dependent on the type of property purchased. If the aim is to choose a lower risk investment then property investment would be selected on the basis of this comparison.
Calculation of net return on investment
When calculating the net rate of return on investment, a number of factors influence the final outcome,
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Amount invested
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Amount interest/profit earned
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Taxation rate
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Inflation rate
The first two of these factors will give the RATE OF RETURN on the investment.
e.g.
This return of 9% can be compared to other forms of investment to investigate if this type of investment was the most profitable over the period of time. However it is important to not make wrong judgements here as other types of returns may not come from short-term investments. Only short-term investments should be compared with other short-term investments over a set period of time. Although, over a long period of time, the returns on short-term investments can be compared to the return on long-term investments over a set time span. For a true indicator of the rate of return, the taxation and inflation rates should be considered. For instance, some investments have tax advantages for some investors. As well, to improve the purchasing power of an investment, it must achieve growth for instance, through earning income at a rate above the inflation rate. Hence, the net rate of return on investment is important for comparison with other investments.
(Source: Accounting Concepts and Applications 4th edition, Phillipa Greig, Joan Mackay, Stacey Beaumont, Rosette Sanger, 2008)
