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What Is Capital Investment? Definition And Meaning

by shagun Saini
What is capital investment

Do you know What is capital investment? How does capital investment help to boost up the economy? Well, here we will understand What is capital investment? Types of Capital Investment and How Capital Investment Works with Capital Investment Example and know some of the Advantages of Capital Investment. So, let us first understand What is capital investment?

What Is Capital Investment?

Capital Investment denotes the amount of money that is to be invested or which is invested in a company to enhance its business operations or its objectives. So, it is the process of obtaining money as a company to fulfill its basic demands, such as purchasing assets or machinery, which even involve the acquisition of long-term assets such as manufacturing plants and machinery, etc.

Two Different Ways Of Capital Investment In Business:

The Capital Investment term can be used in two different ways in business, which are as follows:

  • The first way to invest

    The First way in which capital investment is used in the business is for the purpose of investment, i.e. to enhance the business and its operations.

  • The second way to purchase assets

    The second way in which the capital investment is used in the business is for the purpose of purchasing assets or say to purchase fixed assets for the functioning of the business. Whereas, in a general way, it refers to the lump sum amount invested in the business for the growth and functioning of the business and its operations.

So, the capital investment definition can be stated as money allocated by a firm in assets by which the financial objectives of the business can be achieved. So, A capital investment basically denotes fixed assets which are required to achieve the business or the organization’s objective.

Types of Capital Investment

There exist different two Types of Capital Investment which are as follows:

  1. Financial Capital
  2. Physical Capital 

Financial Capital

Under the Financial Capital investment method, the capital investment is used in the business is for the purpose of investment, i.e. to enhance the business and its operations. Thus, money is usually invested in the form of venture capital, or say a large amount of money invested in the business or before starting of the business.

Physical Capital 

Under the Physical Capital investment method, the capital investment is used in the business is for the purpose of purchasing assets or say to purchase fixed assets for the functioning of the business. the executives in the business can purchase certain fixed assets which may prove to be prosperous for the business.

How Capital Investment Works

The Capital Investment provides the business with the amount that is needed for the functioning of the business as well as to achieve the business goals. The basic purpose of Capital Investment or the need for Capital Investment is to:

  • Purchase of capital assets for expansion
  • Purchase of new technology
  • To substitute existing assets

Capital Investment Example

Below is an example of capital investment

Example 1

ABC wants to set up a business, where the budget of ABC was as follows:

  • Commercial space $ 2,00,000
  • Storage $ 30,000.
  • Inventory $ 2000
  • Vehicles $ 20000
  • The amount borrowed $ 22,000

So, you need to Calculate ABC’s total capital investment.

The total capital investment of ABC for establishing his business will be calculated as follows:

DescriptionAmount ( USD )
Commercial space2,00,000
Storage30,000
Inventory2000
Vehicles20,000
Amount borrowed22,000
Total Capital Investment 2,74,000

So, the Total Capital Investment = $ 2,74,000.

What Are The 3 Sources Of Capital?

The 3 sources of capital for a business are:

  • Retained earnings
  • debt capital and
  • Equity capital.

Advantages Of Capital Investment

Some of the common Advantages of Capital Investment are as follows:

  • Capital Investment boots the economy as new machinery, money and technology are invested in the business.
  • Capital Investment leads to employment generation as the business is running and will require staff and workers too.
  • Capital Investment will boost the GDP of the country.
  • Capital Investment leads to wealth creation for the business owner as well.

FAQ

What Is An Example Of Capital Investment?

ABC wants to set up a business, where the budget of ABC was as follows:

  • Commercial space $ 2,00,000
  • Storage $ 30,000.
  • Inventory $ 2000
  • Vehicles $ 20000
  • The amount borrowed $ 22,000

So, you need to Calculate ABC’s total capital investment.

The total capital investment of ABC for establishing his business will be calculated as follows:

DescriptionAmount ( USD )
Commercial space2,00,000
Storage30,000
Inventory2000
Vehicles20,000
Amount borrowed22,000
Total Capital Investment 2,74,000

So, the Total Capital Investment = $ 2,74,000.

What Are The Types Of Capital Investment?

There exist different two Types of Capital Investment which are as follows:

  1. Financial Capital

  2. Physical Capital 

Financial Capital

Under the Financial Capital investment method, the capital investment is used in the business is for the purpose of investment, i.e. to enhance the business and its operations. Thus, money is usually invested in the form of venture capital, or say a large amount of money invested in the business or before starting of the business.

Physical Capital 

Under the Physical Capital investment method, the capital investment is used in the business is for the purpose of purchasing assets or say to purchase fixed assets for the functioning of the business. the executives in the business can purchase certain fixed assets which may prove to be prosperous for the business.

What Are The 3 Sources Of Capital?

The 3 sources of capital for a business are:

  • Retained earnings
  • debt capital and
  • Equity capital.

Conclusion

Thus, by now we know What is capital investment? Types of Capital Investment and How Capital Investment Works with Capital Investment Example and know some of the Advantages of Capital Investment. Capital Investment denotes the amount of money that is to be invested or which is invested in a company to enhance its business operations or its objectives. So, it is the process of obtaining money as a company to fulfill its basic demands, such as purchasing assets or machinery, which even involve the acquisition of long-term assets such as manufacturing plants and machinery, etc. So, we have understood What is capital investment?

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