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.

RELATED TERMS
  1. Capital Investment

    Funds invested in a firm or enterprise for the purposes of furthering ...
  2. Corporate Finance

    1) The financial activities related to running a corporation. ...
  3. Investment Analysis

    The study of how an investment is likely to perform and how ...
  4. Investing

    The act of committing money or capital to an endeavor with the ...
  5. Long-Term Investments

    An account on the asset side of a company's balance sheet that ...
  6. Capital Investment Factors

    Factors affecting the decisions surrounding capital investment ...
Related Articles
  1. Small Business

    Understanding Capital Investment

    Capital investment is a term that describes a company’s expenditures for long-term assets used in the operation of its business.
  2. Investing

    Understanding Long-Term Investments

    Long-term investments are intended to be held for more than a year.
  3. Small Business

    Understanding Capital

    Capital has a variety of meanings, but it generally refers to financial resources.
  4. Managing Wealth

    Understanding Capital Gains

    Capital gain refers to the increase in value of a capital asset or an investment security upon sale. In other words, if you buy company stock, real estate or fine art and then sell it for more ...
  5. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  6. Investing

    Explaining Capital Flows

    The movement of money for investing, trade or business production, is commonly referred to as capital flows.
  7. Investing

    Explaining Financial Analysis

    Financial analysis is a general term that refers to using financial data to make business and investment decisions.
  8. Small Business

    Capital Budgeting

    Capital budgeting is a planning process used by companies to evaluate which large projects to invest in, and how to finance them. It is sometimes called “investment appraisal.”
  9. Investing

    How Interest Rates Affect Property Values

    When interest rates fall, real estate prices tend to increase. Why? Find out here.
  10. Investing

    Flipping Houses: Is It Better Than Buy and Hold?

    Real estate investors can flip a property or use it for cash flow. Find out which will work in your neck of the woods.
RELATED FAQS
  1. What is the difference between capital investment decision and current asset decision?

    Learn how capital investment decisions are long-term funding decisions, while current asset decisions are short-term funding ... Read Answer >>
  2. How is working capital different from fixed capital?

    Understand the differences between working capital and fixed capital, including definitions and examples of how businesses ... Read Answer >>
  3. What is the lowest capitalization rate before an investment becomes unprofitable?

    Learn about different levels of profitability associated with investments featuring similar capitalization rates. Explore ... Read Answer >>
  4. What is the difference between capital gains and investment income?

    Learn about the difference between capital gains and other types of investment income, such as dividends paid on stock or ... Read Answer >>
  5. How does total capital investment influence economic growth?

    Discover the basic relationship between capital investment and economic growth, and why improving the capital structure increases ... Read Answer >>
  6. How should a company budget for capital expenditures?

    Learn the difference between capital expenditures and operational expenses, and discover the importance of budgeting for ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center