Capital Investments
What more can be said, than the capital investments you make on the capital goods are the capital investments. They are mostly fixed. Investments are just a flow of expenditure over a period of time. They can be on fixed assets like buildings, factories, machinery or additions to the list of the stocks.
The purchase of a machinery means that it is a one time investment. The investor would reap the benefits of it; for a long run. The concept of capital investments differs from each ones understanding. In very ordinary sense it is the purchase of stocks and shares, government bonds and equities would all fall under this category. Hence investment has gained much importance in economics. Investment is the employment of the capital.
Efficiency of the capital
Would you want to know the earning power of your investment Yes you would really want to know its efficiency. The term efficiency would by itself denote the earning power of the capital employed by you. The rate of efficiency could be the expected probability on the income. The employment of the capital allows a return to the entrepreneur. The profitability on the return on the investment over the cost and the rate of interest encourages the investor to employ more and more capital. The more the investment; the more is the risk in the hands of the investor. By increasing the capital investments marginally the investor faces an extra cost i.e. procuring the capital and meeting the rate of interest. This in turn lays a stress on anticipation in the increase in the level of the profit.
Factors that influence the Efficiency of the capital
1. Nature of demand: the changes in the demand influence on the volume of the investment. An increase in the demand means an increase in the investment and a decrease in the demand means a decrease in the investment.
2. Costs of prices: the efficiency of the capital depends on the anticipated changes in prices and costs. The rise in the prices means an increase in the investment and a fall in the costs would also increase the investments.
3. Propensity to consume: the propensity to consume influence the efficiency very much. The increase in tendency to consume will in turn show a rise in the demand for the product; which in turn will increase the investment.
4. Liquid assets: the availability of the liquid assets with the entrepreneurs decides upon the investment and changes in the assets.
5. Taxation: Tax structure shows a considerable influence on the investments. Any reduction and concessions in taxes encourages investment.
6. Public expenditure: goes without saying that the public expenditure has an influence over the private expenditure. The investment is very tax efficient
Capital Investors
The
investors on the capital goods venture with proposals under the capital
budgeting techniques. The evaluation of the profitability of the capital
investments is done with the help of the Net Present Value (NPV)
and Internal Rate of return using the cost of capital as the criterion.
This decides in accepting or rejecting an investment proposal. The NPV
method, allows discount on the future cash flows, while the Internal Rate
of return method compares the cost of capital with the calculated internal
rate of return to determine the value of the capital investment proposals
made. All available investment opportunities should be utilized to the
maximum so that the rate of return exceeds the rate of interest.
The investor should at least earn a minimum required rate of return on
its capital investments which in turn keep the wealth of the investors
unchanged. It also helps to maintain market value of the firm’s
equity shares known as the cost of capital. Cost of capital also refers
to the discount rate used to assess the desirability of the investment
proposals.
Cost of capital plays a key role; in capital budgeting. Cost of capital is the rate of interest. Considered as an important basis for financial appraisal it is compared with the discounted rate of return; which determines whether the proposed project is within the acceptable standards. The rate of returns on an investment should be on a rise than the cost of capital.
Let us assume that the cost of capital of a firm is known. Now that you can make a fair evaluation of the risks involved in the investment projects you can as well plan on further investments. If as an investor you had to pay more than the market rate of interest in order to procure funds this would show investors that the earnings rate of the firm is poor and that the firms development is restricted for the future.
Level of investments
Each of us should be varying in the levels of capital investments . However it is based on the two important factors. It is like the efficiency of the capital or in fact the marginal efficiency of the capital and the rate of the interest. They however should move together. The marginal efficiency if the capital would fall with every increase in the investment of the capital made. It is natural that only when there in no efficient returns on the investment made for the year would you ever think of investing in the business again. An increase in investment don’t you think would result in an increase in production which results for a fall in the demand of the goods produced. So always watch out if there is going to be an increase in the level of investment.
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Investment Properties
Are you Efficient enough in allocation of the financial resources of your firm The investment decisions made on the long-term capital assets like the land, buildings, equipment are considered very important as it enables an organization to make profits. It gives you a clear picture that the future development of a firm to a large extent, depends on effective selection of capital investment projects. Capital budgeting is in fact the process of making investments in capital expenditure.
Capital expenditure points out to the benefits which are expected over a period of time, especially exceeding one year. Capital expenditure decisions are also called long-term investment decisions.
Investments made on acquiring long-term and permanent assets like plants and machinery, cost of additions, expansions, improvement or alterations in fixed assets, and research and development costs all fall under capital expenditure. Stress is laid in Capital budgeting on the firm’s decision to invest its current funds; in expectation of an expected flow of benefits for a long period of time. These long-term activities may also comprise a search for a new and profitable investment proposal and making economic analyses to determine the profit potential of investment proposals also.
As the decisions are long-term oriented, the efficient running of a firm
is a sign of the efficient decisions made for the utilization of the firm’s
financial resources. The most important aspect of a successful doing of
a company lies on the decisions made on capital budgeting decisions which
are of supreme importance, as they can affect the working of a firm.
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