Question

In: Accounting

What do you mean by Capital Investment? Suppose you are going to start a new project;...

What do you mean by Capital Investment? Suppose you are going to start a new project; which investment appraisal method is most suitable for your project and why? Explain.

Solutions

Expert Solution

Capital investment is a sum of money provided to a company to further its business objectives. The term also can refer to a company's acquisition of long-term assets such as real estate, manufacturing plants, and machinery.

Capital investment is a broad term that can be defined in two distinct ways:

  • An individual, a venture capital group, or a financial institution may make a capital investment in a business. A sum of money is handed over as a loan or in return for a promise of repayment or a share of the profits down the road. In this sense of the word, capital means cash.
  • The executives of a company may make a capital investment in the business. They buy long-term assets that will help the company run more efficiently or grow faster. In this sense, capital means physical assets.

There are various investment appraisal methods for the capital investment such as

  • Net present value
  • Accounting rate of return
  • Internal rate of return
  • Modified internal rate of return
  • Adjusted present value
  • Profitability index
  • Equivalent annuity
  • Pay back period
  • Discounted pay back period

In order ,Capital investment appraisal factors are selected based on the priorities of stakeholders and decision makers.

Perhaps if I would ready to start a new project in I would consider the the accounting net present value for the investment of the project as their deals with the payback off the capital and running the business


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