Investment is one of the three major decisions in financial management, the other two being financing and asset management decisions. The investment decision is concerned with determining where to invest funds and at what amount. It is the most important of the three decisions. The financial manager needs to determine the total amount of assets needed to be held by the firm and the composition of the assets. The financing decision involves the makeup of the right-hand side of the balance sheet. Different firms across industries employ varying types and amounts of financing. The dividend policy decision is also closely linked to the decision to invest and finance.

Here are some formulas that are commonly used in investment decision making:

Net Present Value (NPV): NPV is a method of calculating the present value of future cash flows. It is used to determine whether an investment is profitable or not. The formula for NPV is:

Internal Rate of Return (IRR): IRR is the rate at which the net present value of an investment is zero. It is used to determine the profitability of an investment. The formula for IRR is:

Payback Period: Payback period is the length of time required to recover the initial investment. The formula for payback period is:

Profitability Index (PI): PI is the ratio of the present value of future cash flows to the initial investment. It is used to determine the profitability of an investment. The formula for PI is: