Capital Investment

Capital investment is the money invested to purchase fixed assets or large assets required for a business. Businesses require cash to acquire fixed assets like building, land, machinery and equipment, besides taking care of daily operating expenses.

The decisions of capital investment have a great impact on the business and are hence considered to be very crucial that the economic feasibility is evaluated.

Notable points

• A capital investment is best done when one considers its influence in the long run on the profits of the business.

Calculating profitability should be done considering the time value as cash in hand is of more significance than receiving it later at some date.

• Currently available cash is of importance as it generates earnings on investment, while the cash received later have all chances to decline owing to inflation.
• Capital investment increases revenues and revenue growth does not indicate returns from any investment as it is based on many other factors such as loan interest rates, inflation and more. All these have to be considered to calculate the returns.

Determining Practicability

• Determining practicability of capital investment can be done by discounting the cash returns to the time value of money so that this money would denote the net present value. The future flow of income is thereby adjusted to the current value and helps in assessing the returns to be to the cost of the equity funds and debt.

• Calculate present value of net cash flows as it gives an estimate of the amount you will generate through capital investment.
• Assess the current value to buy an asset and the cash required. However, this value increases in cases where you desire to create additional capital or maintain equipment within the available facility.

• Calculate net cash flows or annual benefits such that these benefits represent specific investment and its increased net cash flows after tax.

• A computation of the present value of investment should be calculated from the net present value.

• A capital investment is expected to be positive as any negative figure results in losses.

Footnote

Capital investment is received from investors only when they overcome considerations. Firstly, they should feel convinced that their investment is safe such that their capital can be recovered eventually.

Secondly, investors appreciate knowing their returns are achievable, reasonable and likely. On finding these considerations considerable, the possibility of investment is higher and investors are ready for investment.