Investment refers to the purchase of capital goods. Capital goods are used in the production of other goods. For example, a building contractor who buys a cement mixer, some scaffolding, lorry, computer, office furniture and 5 shovels has invested, these goods will be used repeatedly by the business over a period of time.
Investment might also refer to expenditure by a business that is likely to yield a return in the future.
For example, a business might spend 20 million pounds on research and development into a new house or invest 10 million pounds in a promotion campaign. In each the money has been spent on project now in the hope that a greater amount of money will be generated in the future as a result of expenditure.
Investment appraisal describes how a business might objectively evaluate an investment project to determine whether or not it is likely to be profitable. It also allows businesses to make comparisons between different investment projects. There are several quantitative methods that a business might use when evaluating projects. However, they all involve comparing the capital cost of the project with the net cash flow.
- The capital cost is the amount of money spent on setting up a new venture
- Net cash flow is cash inflows minus cash outflows