Capital investment analysis is generally referred to as analysis of investment alternatives. Capital investment analysis is tightly connected with capital investment decisions that contain the purchase of different items for business, such as machinery, equipment, land, buildings, etc. These decisions are the most important that can be undertaken by the manager, as they often involve large amount of money and will influence business activity during several future years. Even though that influence can be positive and increase business profit, this would occur in future, and the investments are to be made immediately.
Business manager cannot foresee the future, however they have the opportunity to estimate all investment alternatives the best they can. Gathering data and information – is the most essential thing in capital investment analysis.
Selection of the investments that are supposed to improve the financial performance of business contain two tasks: analysis of economic profitability and financial feasibility. Economic profitability will reveal whether the investment alternative is economically profitable. But being economically profitable, the investments may not be financially feasible, or in other words, there may not be sufficient cash flow to make necessary interest and principal payments. Therefore, business manager should fulfill both analyses before making the final decision of accepting or rejecting particular investment alternative.
