Calculating the Benefits of a Capital Investment

In other words, investment is the act of dedicating a present asset with the expectation of an asset’s future value to increase. This process requires the investor to forgo a present asset, whether it’s time, money, or effort, in exchange for a future asset. If the investment fails to meet expectations, it may not yield any profit at all. Rather, it will suffer from a decline in value over time.

To calculate the benefits of a capital investment, determine its profitability. Many business owners are concerned about how to evaluate their project’s potential value. While the process of business planning is not particularly complicated, it is important to consider the potential impact on the firm’s business and its future. The following table presents an example of two different discount rates, one for each. A five percent discount rate produces a positive Net Present Value, while a 10 percent discount rate generates a negative Net Present Value and may result in the project being rejected. A profitable investment is one that has a high Profitability Index (a number greater than one), while a lower one indicates a bad capital investment.

In addition to the profitability of a project, it is also important to determine if it can be financially viable. As an example, an investment proposal with a five percent discount rate results in a positive Net Present Value, whereas a ten percent discount rate results in a negative one, resulting in a negative Net Present Value. A positive Profitability Index will be a good investment, while a negative one may lead to project rejection.