Nature of Capital Investment

Nature of Capital Investment

Any project involves a huge amount investment.

Capital expenditure decisions important and difficult decisions of any firm their following features:

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(i) Future based- Capital expenditure decisions have long-term future based consequences. For example, any expansion in the operating capacity will provide the framework of future activities. One wrong decision can ruin the organisation.

(ii) Irreversible- Capital investment decisions are irreversible in nature. Even if reversal is possible, it will involve a huge capital loss since there is a very unorganised market for used capital equipment. Firms can go bankrupt because of wrong investment decisions.

(iii) Huge Amounts- Capital expenditures involve huge amounts of money. Capital cost tend to increase with advanced technology. Starting a new project or expansion
of the existing plant, for example, involve huge capital outlays.

(iv) Measurement problems- Identifying and measuring the costs and benefits of a capital investment proposal tend to be very difficult and technical. This will be more so when the activities are interrelated or the new project has some intangible consequences.

(v) Uncertainty- Capital investment decisions are uncertain in nature since these involve costs and benefits which extend far into future. It is very difficult to predict the future.

(vi) Temporal spreads- The cost and benefits associated with capital investment decisions are spread out over a long period of time. The temporal spread of infrastructural
projects is even more than the industrial projects. Such temporal spreads create even more problems in estimating the discount rates and establishing equivalences.