Blog 8:Risks in making investment decisions

There are a wide range of factors need to be considered by companies if they want to invest in a specific business project. Indeed, apart of some financial indicators, other investment appraisal tools like NPV, IRR, ARR and payback period need to be taken into consideration. These tools can be divided into two groups; NPV and IRR have already considered time value, while ARR and payback period are not. After analyzed all these four factors, NPV is the one which owns the biggest popularities. The reason to this fact is primarily due to NPV’s goals, as it has the same goals of companies, which is maximizing shareholder wealth. However, should managers only concentrate on NPV but ignore other factors when doing investments? Absolutely not!

The failure investment in Microsoft by Nokia is a typical example. As I have already explained such investment in blog2, which I have estimated that

Nokia’s share price may increase due to these two technical giants’ merge. However, an astonished fell of 14% in Nokia’s share price have occurred after Stephen Elop announced the deal (Financial News, 2011). It seems that both Stephen Elop and I have underestimated the potential risks behind this investment. According to Nokia’s estimation on their return in this investment, their market ratio will reach 18 times and payback period are estimated as 3 years (BBC News, 2011). Ironically, let alone those unreliable figures, Nokia even don’t get the basic exclusive right to using Microsoft’s operating system and they are still required to pay royalties to use it. Hence, Nokia have already been regarded as the biggest looser in this investment deal. From my opinion of view, it is unwise for managers to isolate financial figures and investment appraisal tools alone when they make investment, as there are still so many potential risks need to taking into consideration. More specifically, those financial assessment are taken from uncertain estimation, what was worse, people are more likely to transfer those unreliable data into evaluators on their investments. However, those data’s feasibility only builds on some certain assumptions but ignore some practical business performance like whether it can create synergies or not.