One objective of capital investment decisions is to find out the profitable capital expenditure. “ Capital expenditure is the amount spent by businesses or corporations to purchase, maintain, or improve fixed, tangible assets.” ("How to Calculate Capital Expenditures", 2020) You may also see this referred to as capital expense or even abbreviated at times as CAPEX. These assets will have a large variability depending on what type of business you are in. For the most part, though, they are purchased by companies that are looking to enhance a project or take on a new one. As one might conclude from the name, capital expenditures are an expense and can be found as a negative value or asset on a cash flow statement. Used assets that depreciate can be factored into the company’s taxes. Calculating capital expenditures can be done by obtaining the company’s financial statement and subtracting the fixed assets. Once those steps are completed, you would subtract the accumulated depreciation and add the total depreciation. After the expenditures are calculated, this can be used to help with financial planning.
Another objective of the capital investment decision is that they help a company get new technology to keep them on the same level as their competition. If a company sees that their technology or machinery is outdated and it is taking them longer to complete a task than a company with new technology then an upgrade may be needed. An example of this would be a hospital deciding it could use a new MRI machine that produces clearer images. These can be very expensive so a company may need to examine other options to finance their upgrade. This is where the capital investments come as they provide the company with another avenue to secure funding outside of their regular profit. While the company may be putting itself into debt temporarily to secure the funding for the new technology they are showing that they are confident in their company’s future. The capital investment in new technology will increase productivity and make the business more profitable and able to produce goods or services at a faster rate than it did prior to acquiring capital investment.
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When facilities are considering capital investment opportunities, a strategic plan must be in place. Strategic planning allows hospitals to quantify how much money, regardless of source, their organization needs to achieve its strategic objectives overlaid on financial performance in the future (Arduino, 2018). This allows them to be proactive in the companies' needs moving forward and also provides a clear picture for investors. When seeking out additional funding from an outside source it is necessary to provide the plan for future investors to understand the vision of the organization.
The overall objective is for an organization to earn a profit. Financial return, non-financial benefit, and future funding are all considered when gathering information for the organization's strategic plan. Using this information is necessary for success and identifying the needs of any organization.
Another objective of such capital investment decisions includes the evaluation of various alternatives present for the company in comparing the given outcomes. The outcomes will be compared with both the predetermined investment rate of return and any other alternatives for the given project consideration (Mohamed & McCowan, 2001). A company can make use of the predetermined factors in assessing the alternatives using capital investment decisions- in a screening decision. The decision helps the company eliminate alternatives that are undesirable to reach the company set standards. For instance, if there were four different printing machine options, and the least return had been developed or established then any printers that are not compatible with the expectation of the minimum returns would not be considered. If one or more than one alternative exceeds or meets the least expectations, a preference decision is advised.
Additionally, capital investment decisions are objective towards the company’s expansion and growth. Capital investment decisions are associated with the operational levels of any company or organization. Such an objective to expand and grow is achieved through the process of fixed assets’ acquisition through purchasing plant facilities and any other property. Such a strategy helps the company make both capital investment and good investment balancing as well. Having increased growth and expansion levels helps the company have added value to their services, establish new products, and also increase their unit production.
Furthermore, capital investment decisions are objective towards the process of renewal and replacement in any given organization or company. Capital investment decisions help in the renewal process such that having renewal allows overhauling, retrofitting, and rebuilding an existent asset. Such a renewal process helps the company in improving both productions and increasing its overall profits (Kleiner, 2001). Capital investment decisions help in assessing the replacement process such that when a company experiences slowed growth, outdated or worn-out assets such as equipment, vehicles or machinery, changes can be made. Such changes due to the capital investment decisions yield the desired expectations and production is guaranteed once again.
References
Arduino, K. (2018). The Increasing Importance of Strategic Capital Planning.
Retrieved from https://www.hfma.org/topics/hfm/2018/february/59164.html
How to Calculate Capital Expenditures (2020).
Retrieved from: https://www.indeed.com/career-advice/career-development/how-to-calculate-capital-expenditures
Mohamed, S., & McCowan, A. K. (2001). Modelling project investment decisions under uncertainty using possibility theory. International Journal of Project Management , 19 (4), 231-241.
Retrieved from https://www.sciencedirect.com/science/article/pii/S0263786399000770
Kleiner, Y. (2001). Scheduling inspection and renewal of large infrastructure assets. Journal of infrastructure systems , 7 (4), 136-143.
Retrieved from https://ascelibrary.org/doi/abs/10.1061/(ASCE)1076-0342(2001)7:4(136)
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