To make an investment is to commit funds with the intention of receiving a return/profit in the near future. Simply put, to make an investment means purchasing an asset with the intention of generating an income from the investment or, in the case of stocks and bonds, the appreciation of the underlying asset. Since the purpose of making investments is for the investor to reap profit, one must analyze the risk-reward relationship between the investment and the market. An integral part of this analysis is the time factor. A longer time frame in terms of years is required for an individual to reap significant profit whereas a shorter time frame may not be optimal as returns may be lower as the investment in a given asset ages.
Some of the areas that require the scrutiny of capital investment include fixed assets such as plant and equipment, and long-term assets like inventory. Fixed capital represents the value that the assets will bring at maturity whereas a long-term asset such as inventory represents the value that the assets will have after a particular time, usually a number of years. While a business can choose to make both types of capital investments, it is more often the case that the business will choose to make a fixed capital investment and the long-term asset will represent the inventory in that case.
When determining whether to make capital investments, the choice of assets to include in the portfolio will depend on the anticipated amount of earnings that the company will generate in a given year. A company’s balance sheet, often obtained from the Securities and Exchange Commission (SEC) upon request, is the basis for calculating the capital assets and liabilities. This balance sheet is divided into two sections: identifiable assets and intangible assets.