A company’s capital investment is the money it spends on fixed assets like land, machinery, and buildings. Cash, assets, or loans may be used to fund the project. Businesses may struggle to start the ground without capital investment. I plan to invest in my sister’s small business which is an online store for hand-made bags. I think this project has a great potential as today hand-made things like bags are becoming popular among teenagers. I do think that we always select products with high return value as the main goal is to increase profit.
Before putting any money into a company, organization, or idea, it is critical to undertake market research and determine the company’s market share. This can be used to find whether it is a good idea and what the potential return is (Brigham & Ehrhardt, 2020). Moreover, the initial capital expenditure must be sufficient to cover “all costs of starting, opening, and operating the firm until the business generates enough revenue from sales and services to reimburse or cover all operating costs” (What is capital investment, 2021). I think that my capital would be enough to invest in my sister’s project. I made this investment decision in accordance with the amount of capital I have, the project needs and the potential revenues that I would obtain after starting the project.
Capital investment decisions are made frequently, and it is critical for a firm to assess its project requirements to chart a course for future growth. This choice is not as plain or straightforward as it may appear. With a huge outlay of capital, there is much on the line, and the long-term financial impact may be uncertain due to the capital outlay diminishing or increasing over time (What is capital investment, 2021). With regards to my project, there are many factors to consider, for example, how online operations will proceed, how much money my sister needs to sustain the store and the cost of making bags. A company’s capital investment decision is a long-term growth strategy, and as such my investment is a part of my growth plan for future projects. Investments are made to improve operational capacity, increase market share, and increase revenue; thus, I am planning to expand the project further by allocating more investments in the future. Therefore, a deep financial analysis is required, considering the company’s development into new goods or markets.
In general, there are risks that can be emerged during the project. Capital risk refers to the possibility of losing all or part of an investment. It relates to a wide range of assets that do not guarantee a complete return on investment. Investors take up capital risk, also known as market risk, when they invest in products or services that are not well-researched (What is capital investment, 2021). Therefore, it is extremely important to consider each aspect of a project. I observed how my sister was organizing her business and managing it for the past month, and I am now sure that I can invest in this business. This is because it provides a strong potential for growth. For my project, I would assess potential risks and try to understand how to overcome them by looking at the first three months after the project starts.
With regards to WACC is calculated by multiplying the cost of each capital source (debt and equity) by its weighted average market value, then adding the products to get the total cost of capital. The cost of equity can be estimated by applying the capital asset pricing model (CAPM). WACC is used by investors to judge whether an investment is worthwhile, and by management to determine whether a project is feasible.
Reference
Brigham, E. F., & Ehrhardt, M. C. (2020). Financial management: Theory and practice (16th ed.). Cengage Learning. Web.
What is capital investment? (2021). The Balance Small Business. Web.