Capital investment analysis

Capital investment is defined as the acquisition of a fixed asset that is anticipated to have a long life of use before it has to be replaced or repaired. Capital investment is the money invested in a business venture with an expectation of income, and recovered through earnings generated by the business over several years. It is the capital expenditure than for day-to-day operations or the working capital or other expenses.

Capital investment analysis refers to the process of comparison of the sums to be invested in a project with the earnings expected over the period of the investment, expressed usually as return-on-investment (ROI) percentage per accounting period. This method of investment analysis is used to determine or to analyze future returns from an investment of capital in order to evaluate the capital recovery pattern and the periodic earnings from the investment.

Capital investment Analysis that involves the purchase of items such as land, machinery, buildings, or equipment considers the most important decisions undertaken by the business manager. These decisions involved under this analysis require the commitment of large sums of money, and they will affect the business over a number of years. The funds required to purchase a capital item must be paid out immediately, whereas the income or benefits accrue over time. This is because the benefits that are acquired are based on future events and the ability to foresee the future is imperfect, you should make a considerable effort to evaluate investment alternatives as thoroughly as possible. Gathering data is the most important task in the analysis.

The Capital investment analysis includes two fundamental tasks. First is the economic profitability and this is essential to determine whether the investment will contribute to the long run profits of the business. The second task is financial feasibility which determines whether or not the investment will generate sufficient cash income to make the principal and interest payments on borrowed funds used to purchase the asset.

Questions

• What is capital investment analysis?
• What are the tasks involved in this analysis?