Describe the elements involved in capital investment calculations. Can you think of any additional elements beyond the numeric ones described in the chapter that should be considered?
Sample Solution
1. Initial Investment: The total cost associated with the purchase of assets or services related to capital investment.
2. Discount Rate:The rate used to convert future cash flows into present values.
3. Cash Flow: The expected inflows and outflows of money over the life of an investment, including income generated from operations, interest payments, dividends and tax savings.
4. Internal Rate of Return (IRR): A metric that measures the rate at which a company can expect to earn on its capital investments by taking into account both the initial invested amount as well as any additional cash flows generated in subsequent years.
5. Net Present Value (NPV): A measure of profitability that takes into account all expected costs and returns associated with an investment project by discounting them back to their present value using a calculated discount rate for comparison purposes.