What is Capital Investment Analysis?

Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc. 

The capital investment decision involves those factors which can influence the business for a longer period. The capital investment decision is a part of the process of capital investment which also includes how the money or the fund that has been raised is to be located in various factors of production so that the business can survive in the long run or in the long-term. It also includes the evaluation of the quantitative and qualitative factors of a business and ultimately helps in making the decision that how the fund or money must be allocated in the business for optimum result. 

The firms which are new in the industry since their capital investment through various sources which include sponsorships, other industries, and so on. Whereas the long-term farms of the industry acquire the capital investment mostly by mortgaging assets to the bank. They are for the difference between the gnu companies and long-term companies can be made in a way that the long-term companies raise their funds or make the capital investment from banks or other established institutions whereas the small companies of the industry do their capital investment from various kind of sponsorships and other unknown sources. But while taking any kind of capital investment decisions there are certain factors that complicate the capital investment. These can be considered as some sort of disadvantages that every business or company needs to face while making the decision of capital investment. Some of these factors include income tax, the concept of leaving and Purchasing, fluctuation in the price level, and changes in qualitative factors. 

Income Tax

Income tax is the problem to a business when capital investment decisions are made because it includes the evaluation of the cash flows from time to time when the income tax must be provided. If the cash flow or income does not arrive on time to the company then it becomes difficult for a business or a company to fulfill the need of the income tax. Therefore, the evaluation of the timing of cash flows along with the timing of income tax is important to have a successful business.

The Decision of Leasing or Purchasing

Evaluation of leasing out an asset or purchasing an asset is profitable is the important thing that a company or a business decides. For example, if a business leases out its land to some other business it means that the business will receive rent from the other company to which it has provided the land. Whereas purchasing includes the acquisition of an asset with the fund of the company or even getting some loan and the cost of the loan is paying interest, therefore, the loan does come under the purchasing of the asset for the well-being of the business in the future. 

Fluctuations in Price Level and Qualitative Factors

It is known that the fluctuation of the price level is dependent on how the economy behaves from time to time. Accordingly, If there is development in the economy the price will behave accordingly and if the economy is in its developing stage then the price will behave in a different way.

Now depending on how the fluctuation of the price is in the economy the business requires to decide accordingly. If the economy is doing well and is having sufficient aggregate demand, then there are chances of inflation which pushes up the interest rate in the banks which ultimately causes pressure on the investors or the business to decide whether to opt for the capital investment or not. Since they need to pay a higher interest rate for borrowing money that can help them in the future for growing their business or company. The investment should be evaluated carefully before making the capital investment decision. The payback from the investment all return on investment depends on the kind of price fluctuation that is taking place in the economy. It may also include what kind of payback does the company gives to his shareholder depending on the inflation level or the deflation level.

Some of the qualitative factors which play an important role in capital investment decisions are what kind of capital expenditure is chosen, what are the budgets, and so on. Among many factors, what kind of strategic investments should be done is a qualitative factor that influences or complicates the capital investment decision. Strategic investment decisions are those kinds of decision which actually influences the long-term capability of a company in order to produce profits. The capital investment decision or evaluation may be influenced by various qualitative factors. Some of them are the quality of products coma how versatile the products are, the working environment and how does the spirit of the workers is, what kind of control does the company has on the production, and so on. 

 Another quality factor is commitment. How much the company or the business is committed to providing a good quality product to its customer also plays a role in directly influencing what kind of capital investment decisions must be taken. 

Key Takeaways

Therefore, the capital investment decision is the amalgamation of all kinds of payback that a company needs to incur, the capital expenditure it needs to make, locating all kinds of expenses from its budgets.

The cost and benefit considerations are also made while taking these kinds of capital investments which helps them to secure a profitable position in the industry. This kind of decision involves a lot of research and plan from time to time in the existing business framework so that the customer and the employer are happy which helps in taking into consideration good Financial management of the business or the company.

The process for accounting the investment or the method of accounting the investment or undertaking any kind of project of investment requires a lot of knowledge of the company manager or the business manager to get a proper value back to recognize what kind of returns is possible from the capital investment that has been done. It can either be through sponsorships or through established financial institutions. 

Context and Applications:

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for      

• BBA
• B.COM
• M.COM