Capital investments are investments with a life of one year or more. Companies make capital investments to generate value for their shareholders.
Capital allocation is the process by which companies make capital investment decisions. Capital allocation is important because it impacts a company’s future.
This reading covers:
Companies invest for two primary reasons – to maintain their existing business and to grow it.
Projects undertaken by companies to maintain the business include:
Example: machine replacement, infrastructure improvement
Example: factory pollution control installation, performance bond posting to guarantee satisfactory project completion
Projects undertaken by companies to expand the business include:
Example: new product or service development, merger, acquisition
Example: exploration investment into a new innovation, business model, or idea
(These definitions and examples are taken from Exhibit 1 of the curriculum.)
Going Concern Projects