Author(s)

Zihan Yang

Corresponding Author

Zihan Yang

ABSTRACT

This paper is proposed to explore an appropriate strategy for evaluating enterprises’ investment decisions. As a consequence of the scarcity of market resources and limited enterprise budget, when expanding business, it is necessary for enterprises to decide which project is worthy of investment and their priority. The data is collected from an insurance enterprise, which faced an investment decision in 2015. The enterprise received the applications from Dalian, Qingdao, and Ningbo branches, concerning constructing their subordinate institutions. Through assessing with the widely applied Net Present Value (NPV) model, which performs as a gold rule in this field. The net cash flow is the direct yield for an enterprise, and it is calculated by discounting predictable future income until 2020 and subtracting initial investments in 2015, containing time value of money presented as discount factor. According to calculation, the NPV value of establishing institution in Ningbo Branch is the highest, which signifies that it is cost-effective and should be prioritized. In this research, the risk factor of discount rate fluctuation is considered and incorporated into the original calculation structure, forming a modified version——Net Present Value at risk (NPV at risk). There are differences between the values of two models, which will be an important impact for enterprises’ investment decisions.

KEYWORDS

investment decisions, NPV model, NPV at risk model, discount rate, risk factor