Investment Decisions Reducing Cost
Such decisions by reducing costs, add to the total earnings of the firm. A classic example of such investment decisions are the replacement proposals when an asset wears out or becomes outdated. The firm must decide whether to continue with the existing assets or replace them. The firm evaluates the benefits from the new machine in terms of lower operating cost and me outlay that would be needed to replace me machine. An expenditure on a new machine may be quite justifiable in the light Of me total cost savings that result.
A fundamental difference between the above two categories 0f investment decision lies in the fact that Cost-reduction investment decisions are subject to less uncertainty in comparison to the revenue-affecting investment decisions. This is so because the firm has a better feel for potential cost savings as it can examine past production and cost data. However it is difficult to precisely estimate the revenues and COSt resulting from a new product lint particularly when the firm knows relatively little about the same