Capital Investment

Capital Investment Definition

Capital Investment refers to any sum of money that is usually provided to a company to help it achieve and further its business objective. The term may also refer to any sort of long term acquisition by the business such as real estates, machinery, industries, etc.

Types of Capital Investment

Usually, capital investments that are undertaken may fall under 2 broad categories.

Example of Capital Investment

Mr. Smith wants to set up an FMCG trading business. He goes on to appropriate his budget towards the following items. Commercial space 150000$. Storage 15000$. Inventory 5000$, Vehicles-20000$, Amount borrowed-25000$. Calculate Mr. Smith’s total capital investment.

The total capital investment of Mr. Smith towards his establishment can be calculated as follows –

Capital Investment Example 1

  • Total Capital Investment = 215000

Advantages of Capital Investment

  • Economic Boost – When an entrepreneur invests in any business, it goes on to boost the economy owing to the increased economic activity. Goods and services will now be delivered in accordance with the needs of the society, or a business may be run to solve a particular problem.
  • Employment Generation – When capital is invested in starting a business, the owner may go on to employ certain staff to run the day to day activity. Thus additional employment goes on to be created in the country and helps tackle the problem of unemployment.
  • Efficiency in Markets and Competition – Had it not been for risk-takers who invest in a business, there would be no products and services to solve the day to day needs of the consumers. Moreover, investing in a similar business that would be a competition to the existing business in the same line would tend to bring about efficiency as they would now go on to better themselves to grab the maximum pie in the market by enhancing their market share.
  • Value Creation – When new capital is invested in the business, there seems to be self-employment that would further boost the GDP and per capita incomePer Capita IncomeThe per capita income formula depicts the average income of a region computed by dividing the total income of that area by the total population of the region. It is used to figure out the average income of a city, provision, state, country, etc.read more in the economy. The entrepreneur, if successful, may make way to build a business empire altogether. There will be further value creation in the economy.
  • Wealth Creation – The investors may go on to build on wealth if all goes well with the business. The owners may make a hefty amount that would not have been otherwise possible in their regular jobs. The investors will prudently compare the return on investments and the IRR and thereby make the right decision of investing in the right business. And if all goes well, it tends to be a wealth creator for the capital investors and also to the employees in the form of bonuses.

Disadvantages of Capital Investment

Limitations

  • Capital investment, no doubt, would boost the economy, but one wrong move into a wrong venture or into the purchase of inappropriate assets that do not value-adding. may erode the wealth of the capital contributor

Conclusion

Capital investment, no doubt, stands to be a really good economy booster by being a value-adding catalyst along with creating jobs for the people of the country to provide goods and services to meet the demands of the public and better their standards of living. There is no doubt that there is significant exposure to risk and the necessary scrutiny by all the stakeholders.

However, if an environment is created which is business-friendly that will allow more investors to pump in money and thereby allow capital to move freely into the right ventures, and ensuring they are efficiently managed may help them steer the business towards success for the benefit of all the stakeholders and society as a whole.

Recommended Articles

This article has been a guide to what is Capital Investment and its definition. Here we discuss examples of capital investment along with its types, advantages, disadvantages, and limitations. You can learn more about finance from following articles –

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Comments

  1. Augustine zibuka says

    an exciting explanation of the capital investment cons and pros.

    • Dheeraj Vaidya says

      Thanks for your kind words!

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