Capital Investment Analysis

DEFINITION of 'Capital Investment Analysis'

A budgeting procedure that companies and government agencies use to assess the potential profitability of a long-term investment. Capital investment analysis assesses long-term investments, which might include fixed assets like equipment, machinery or real estate. The goal of this process is to pinpoint the option that is most likely to be the most profitable for the business. Businesses may use techniques such as discounted cash flow analysis, risk-return analysis, risk-neutral valuation and utility theory in a capital investment analysis.

BREAKING DOWN 'Capital Investment Analysis'

Capital investments are risky because they involve large, up-front expenditures on assets intended for many years of service and that will take a long time to pay for themselves. If a capital investment is financed, it must earn an even greater return, to compensate for the interest the company must pay on the financed funds. Furthermore, a poor investment decision may not be reversible. For all of these reasons, it is crucial that a company perform a capital investment analysis before making any high-stakes capital investment decision.