What is Capital Investment Factors?

Capital investment factors are factors affecting the decisions surrounding capital investment projects. Capital investment factors are elements of a project decision, such as cost of capital or the duration of investment, which must be weighed to determine whether an investment should be made, and if so, in what manner the investment is best made in order to maximize utility for the investor. 

Capital investment factors may also be described as "factors influencing investment decisions" or "capital investment decisions."

How Capital Investment Factors Work

Capital investment factors can relate to almost any aspect of an investment decision. These decisions may include regulatory environment, risks associated to the investment, macro-economic outlook, competitive landscape, time to complete a project, concerns of shareholders, governance, probability of success/failure, and opportunity costs, to name a few.

Key Takeaways

  • Capital investment factors are considered when making decisions about capital investment projects.
  • Capital investment factors can represent many aspects of an investment decision on a capital project from the probability of failure vs. success to navigating the regulatory environment.
  • Small business owners, as well as large corporations, may use capital investment factors when considering investment decisions.
  • Investors and creators of capital investment projects will take several steps in the decision-making process and capital investment factors will be weighed and discussed.

All factors should be examined before coming to a final decision on capital investment projects.

Capital Investment Factors that Affect Decision-Making

Capital investment factors may take a number of forms. They include:

  • The outlook of a company's management team
  • How technological changes and advancements may uncover previously unknown opportunities
  • How competition may affect the market landscape and potentially change previous assumptions
  • Fiscal incentives, such as tax reductions, grants, and subsidies
  • The market and changing forecasts (unforeseen changes in local and global markets may render previous assumptions invalid)

A variety of other factors that have nothing to do with economics may also factor into capital investment decisions (culture, religion, family, tradition, governmental role, for example).

How Decisions Are Made Using Capital Investment Factors

Several capital investment factors may go into the capital investment decision-making process. The following are typical steps:

  • Project identification: Finding an appropriate project for consideration.
  • Project definition and vetting: Accurately categorizing a project as a means to fully understanding it, as well as ensuring that it is appropriate.
  • Analyzing and accepting: Setting and checking the parameters for a successful project that meets an organization's goals, as well as formally engaging in a project.
  • Implementation: Where the work on a project begins, and actions are undertaken to work toward a successful outcome.
  • Monitoring: Constantly reviewing decisions and actions to ensure that a project is kept on track, as well as to provide an opportunity to improve and alter processes and decision-making.
  • Post audit: Analyzing the outcome of a project or investment to determine whether it delivered on the original goals and intents as a way of determining whether it was successful. Also provides a means to improve further and refine processes.