Capital investment

Definition

Capital investment involves allocating resources, often in the form of money, towards long-term assets or projects to generate future benefits and returns. These decisions are crucial for a company’s strategic growth and operational efficiency.

5 Must Know Facts For Your Next Test

1. Capital investment decisions typically involve substantial financial commitment and long-term planning.
2. Key methods for evaluating capital investments include Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period.
3. Risk assessment is an essential part of the capital investment process to ensure viable returns.
4. These investments can include purchasing new machinery, upgrading technology, or expanding facilities.
5. Accurate forecasting and analysis are critical to successful capital investment decisions.

Review Questions

• What are the common methods used for evaluating capital investments?
• Why is risk assessment important in capital investment decisions?
• Give two examples of what might be considered a capital investment.

Related terms

Net Present Value (NPV): A method used to evaluate the profitability of an investment by calculating the difference between the present value of cash inflows and outflows.

Internal Rate of Return (IRR): The discount rate that makes the net present value of all cash flows from a particular project equal to zero.

Payback Period: The time required for the return on an investment to repay its original cost.