ISSN 1822-6515 ISSN 1822-6515 EKONOMIKA IR VADYBA: 2010. 15 ECONOMICS AND MANAGEMENT: 2010. 15 1018 INVESTMENT DECISION MAKING CRITERIONS IN PRACTICE Hana Scholleova 1 , Jiri Fotr 2 , Lenka Svecova 3 1 University of Economics in Prague, Czech Republic, scholl@vse.cz 2 University of Economics in Prague, Czech Republic, fotr@vse.cz 3 University of Economics in Prague, Czech Republic, lenka@vse.cz Abstract Investment decision making is an important part of strategic decision making in every enterprise because new investment projects essentially affect future economic results and the enterprise´s prosperity. Successfulness of new projects dramatically contributes to the growth of enterprise´s efficiency. On the other hand, unsuccessfulness can lead not only to a considerable decline in efficiency, but it can even jeopardize its future existence. Successfulness or unsuccessfulness of projects considerably depends on the quality of preparing, evaluating and choosing these projects. The quality of investment decision making is affected by a larger number of factors, while the most important of them include choice of the criterions applied in evaluating and choosing investment projects. The article´s aim is a presentation of the results of the empirical research done at Faculty of Business Administration of University of Economics in Prague (Kislingerová, 2008) and comparing them with results of other researches on that issue. Keywords: investment, investment valuating methods, NPV, IRR, Payback Period. Introduction The empirical research of investment decision making at Faculty of Business Administration of Economics in Prague in a form of questionnaire investigation was done in the terms of the solution of research intention MSM 6138439905 “New theory of organizations´ economy and management and their adaptation processes”. This investigation was done before the period of economic and financial crisis at the edge of year 2007 in chosen Czech enterprises (in total 252 well filled questionnaires were gained and elaborated). Each questionnaire contained 77 basic questions focused on enterprise´s economy and management and other 15 questions aimed specially at logistics. Most questions were conceived so as the examined one could answer by choosing one or more possibilities or by a particular value if you like. In addition to the research mentioned above, results of other researches of similar area were used, realized both in the Czech Republic and then in the USA, Great Britain, Finland and Sweden. Classification of criterions of investment decision making Projects of investment character can be in term of quantitative outputs characterized by three basic factors, namely by cash flows, or if you like by the difference between receipts and expenditures resulting from the investment, by the real service life and by the risk, that is run by implementation of the investment and for which the enterprise should require an adequate return. There are many methods or criterions for evaluating capital projects that approach to these basic factors in different ways. Criterions of evaluating capital projects can be divided into two groups – static and dynamic criterions. Static criterions consider mainly cash flows. They consider time in constraint mode and in principle they do not work with risk. They include e.g. total investment income, net total investment income, annual average returnability, average payback period, payback period. Dynamic criterions take into account all three factors which mean cash flows, service life and undergone risk as well. They involve e.g. Net Present Value (NPV), Internal rate of return (IRR), Profitability index (PI), Benefit-Cost Ratio (CBR), Discounted Payback period (PP), Discounted Economic Value Added (DEVA), Annuity (AN). During the evaluation of investments, other instruments are being used, mainly in connection with integration of the risk and uncertainty into this process of evaluation. They include above all sensitivity analysis, scenarios and simulation techniques. Evaluation of flexible investment projects is enabled by real options. Choice of a criterion for evaluating investments reflects more aspects, mainly preferences of the decision-maker (impact on relative or absolute profitability, stress on short Payback Period, existence of the budget constraint), then also intensity and elaborateness of application of particular criterions, relevance of the decision, time pressure or customs in the organization.