What are Capital Investment Decisions?

Capital investment decisions involve the judgments made by a management team in regard to how funds will be spent to procure capital assets. There are a number of factors that management must consider when making capital investment decisions, such as:

Ability to achieve a return. Whether the entity’s cost of capital is low enough to permit an investment that will yield a positive return.
Availability of funding. Whether the firm has sufficient funding available to pay for the assets that it wishes to acquire.
Bottleneck enhancement. Whether the investment will improve the capacity of the firm’s bottleneck operation, thereby increasing the throughput of the organization.
Changes in the breakeven point. Whether a projected increase in fixed assets will increase the breakeven point of the business, requiring the firm to generate more sales before it can earn a profit.
Deferral of investment. Whether an investment to replace an asset can be deferred by enhancing the maintenance of the existing asset.
Mandated by regulations. Whether the investment is required by regulatory requirements, irrespective of the return on investment.
Reliability of projected sales. Whether a projected increase in sales for which capacity is being increased will actually occur.
Return on investment. Whether the cash flows from the investment will generate a positive return on investment.
Strategic fit. How well an investment fits into the long-term strategy of the business.