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Capital Investment Decisions
Describe the elements involved in capital investment calculations. Can you think of any additional elements beyond the numeric ones described in the chapter that should be considered?
Submission Instructions:
Any written explanations should use complete sentences, and appropriate grammar, punctuation, spelling and word usage.
Your initial post should be at 200-300 words,
formatted and cited in current APA style with support from at least 2 academic sources. Your initial post is worth 8 points.
You should respond to at least two of your peers by extending, refuting/correcting, or adding additional nuance to their posts.
Your reply posts are worth 2 points (1 point per response.)
All replies must be constructive and use literature where possible.
Post 1
When considering capital investments an organization has a lot to consider rather than just return on investment.
Some consideration is how investment projects effect the company internally and externally in the marketplace. Considering if the investment aligns with long term goals and strategy of the organization.
The undertaking of building a new plant or investing in buying a competing company involves all talents within the organization.
Financially or numerically speaking, the investment must meet the organization’s desired internal rate of return (IRR).
There is no set benchmark return for investment for organizations, this arbitrary number is determined by the executive team.
The time frame for return (payback) as well cash inflows and outflows are easily attained for a company to either accept or reject an investment. Net present value (NPV) can also assist on whether investment capital is best left in an investment account collecting interest versus put to work on a capital investment project.
Payback analysis is very simplistic as it takes total outflow of capital investment and is divided by average yearly cash inflows generated by the investment to deliver a time to recoup the investment.
Regardless of which analysis an organization uses, the decision to invest must be cautiously considered to how it will effect an organization, employees, and reputation currently and in the future.
Ideally, businesses would pursue any and all projects and opportunities that enhance shareholder value. (Kenton, 2020).
References
Anthony, R., Hawkins, D. Merchant, K. (2011) Accounting: Text and Cases. New York: McGraw-Hill Irwin
Hawkins, D. (2006, January), Alternate Choice Decision Analysis. Harvard Business School
Retrieved from:
https://www.hbs.edu/faculty/Pages/item.aspx?num=32937
(Links to an external site.)
Hertz, D. (1979 Sept.) Risk Analysis in Capital Investment

Retrieved from:
https://hbr.org/1979/09/risk-analysis-in-capital-investment
(Links to an external site.)
Kenton, W. (2020, May 10) Capital Budgeting




Retrieved from:
https://www.investopedia.com/terms/c/capitalbudgeting.asp

Post 2
Capital investment analysis is 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 identify the option or project(s) that can yield the highest return on invested capital. While selecting the project a company should also consider the effect of such projects on the society. Apart from the profit maximization, a company should also need to fulfill the obligation towards the society as well as consider the applicable laws and the involvement of the government during the life of the project.
Capital investment decisions are not made lightly and although analytical models are easy to set up, the inputs, however, drive model results; therefore, reasonable assumptions are critical for determining whether a contemplated investment goes forward. Cash flows beyond, say, three or five years can be difficult to project. The discount rate, when applied to years far into the future, has a substantial impact on the present value calculation. Sensitivity analysis, whereby varying inputs are plugged into the model to gauge changes in value, should be performed. But even then, unexpected events can upset the best designed model with the most reasonable assumptions, in which case the modeler may decide to integrate contingency factors into the analysis. (Kenton, 2018).
Invested capital is the funds invested in a business during its life by shareholders, bond holders, and lenders. This can include non-cash assets contributed by shareholders, such as the value of a building contributed by a shareholder in exchange for shares
or the value of services rendered in exchange for shares.
According to the Bragg analysis, the calculation for invested capital under the financing approach is:
+ Amount paid for shares issued
+ Amount paid by bond holders for bonds issued
+ Other funds loaned by lenders
+ Lease obligations
– Cash and investments not needed to support operations
= Invested capital
Reference
Reference:
Kenton, Will. (Mar 9, 2018). Capital Investment Analysis. Retrieved from:
https://www.investopedia.com/terms/c/capital-investment-analysis.asp
(Links to an external site.)
Bragg, Steven. (May 13, 2018). Invested capital
(Links to an external site.). Retrieved from:
https://www.accountingtools.com/articles/invested-capital-definition-and-usage.html