Introduction to Capital Expenditure
Accounting (Year 12) - Capital Expenditure
What is Capital Investing and Why Does It Matter?
Capital investing is measuring the returns from an investment in capital in terms of:
Time: How long until I get my money back?
Value of Return: How much money will I make over time?
Capital investing is important as it usually involves large amounts of money, so we want to make sure we are making the right decision for the business. Think about a big purchase you will make in your own life, such as your first car.
Automatically, you're already thinking the following:
How much will it cost me? (Capital investment)
How long it will last? (Useful Life)
What benefits will I receive over time? (Value of return)
For the last point, benefits do not remain constant. The return will depreciate over time, as the older the car, the more work it has done, the less appeal of the car. Likewise, for a business, the cash benefits from machinery are likely to reduce over time. For this section we explore two different capital investment tools:
Payback Period: Measure of return in terms of time
Net Present Value: Measure of returns in value.