CAT / FIA FMA Syllabus D. Budgeting - Capital investment planning and control - Notes ^{1 / 10}

Capital investment

Capital investment involves expenditure on non-current assets for use in a project which is intended to provide a return by way of interest, dividends or capital appreciation. 

Capital investment decisions are crucial to the running of a business in the long term. It affects the following areas

1. Growth

   Without capital investment companies cannot grow and expand. The decisions made affect the long term.  

   If the wrong capital investment decisions are done, then this can burden a company unnecessarily. 

   However a company must invest in order to maintain its market share and hopefully grow.

2. Risk

   Capital investment is a long term investment. It requires long term funding. 

   This long term commitment brings with it risks; e.g. the risks of defaulting on the financing. 

   However, the potential gains made from the investment may fluctuate more than the previous gains made by the business. 

   Such fluctuations make the company more risky.

3. Funding

   Capital investment is often a large amount - this means the company will need to look for finance, both internally and externally. 

   The choice of finance type is crucial, as it needs to be appropriate for the investment type and the company at the time

4. Complexity

   Investment decisions are often based on future estimates, often in many years time. 

   Estimates and variables are used which are often interrelated. 

   The estimates and variables will also change over time due to changes in the environment in which the company operates (economic, political, social, technological, environmental and legal).