Capital investment refers to the amount of funds, generally involves huge investments, that a business owner spends on the purchase of long term capital asset such as fixed assets that includes Plant & Machinery, building, furniture etc. that will provide economic benefits to the business for a long period but does not include expenses that is done by the business while conducting routine operations.
Explanation with Example
The capital investment requires huge amount of funds as the capital assets are very expensive. For the growth and survival of the business these capital investments are required. For example if a person wants to start a business than he has to arrange a place of business i.e. land & Building which need huge amount of money and that land and building will be used for several years so that investment is the capital investment.
Another example is the Machinery that a business requires to manufacture the goods which is further sold to generate revenue. Say, A Company named Cloth incorporation deals with manufacturing and supply of clothes that requires dyeing machines. That dyeing machine cost $25,000. The purchase of such dyeing machine is the capital investment for Cloth incorporation.
The sources of raising funds for these investments include owned funds, equity funding, debt funding, and loan from financial institutions etc.
These investments are done by every business owner to own the assets that will be required for the growth and survival of the business. It involves spending of funds for generating future economic benefits, increase efficiency of operations, generate revenues at large scale and to acquire large share in this competitive market.
Advantages of Capital Investment
The advantages are as follows:
- The first and foremost advantage of the capital investment is the generation of revenue with the use of such assets for several years. This one-time investment helps to earn revenue for longer duration of time.
- It brings efficiency in the operations of the business as the machinery is updated time to time by doing more capital investment.
- A wise decision of capital investment helps in taking competitive advantage because when a firm has all the required capital assets then it can provide better quality of products on time to the customers.
- To run the Plant & Machinery a firm requires labour. Therefore, with capital investment employment can be generated.
Limitations of Capital Investment
The limitations of are as follows:
- Huge monetary funds are required for these investments. So besides the cost of purchasing many firms who do not have owned funds have to incur cost of finance such as interest cost (on loans etc.) to buy the required plant & machinery.
- At some point of time the capital asset becomes obsolete and requires replacement. Such replacement again requires large funds.
Thus, Capital Investment is the long term investment of the business which involves spending of huge sum of money. Capital investment is important to generate revenue for long durations. The example of capital investment is spending of money on the purchase of plant & machinery, office furniture etc.