Capital Investment Decisions
Capital investment decisions in equipment, buildings, structures and materials have important economic implications over the life of the investment. Examples of capital investment decisions include selecting the insulation for a building, choosing a heating and air conditioning system, purchasing a fuel-efficient vehicle that satisfies an individual's needs, and selecting an energy-generation facility for an industrial plant.
Capital investment decisions are best made within the context of a life-cycle cost analysis. Life-cycle cost analysis focuses on the costs incurred over the life of the investment, assuming only candidate investments are considered that meet minimally acceptable performance standards in terms of the non-monetary impacts of the investment. Using life-cycle analysis, the capital investment decision takes into account not just the initial acquisition or purchase cost, but maintenance, energy use, the expected life of the investment, and the opportunity cost of capital. When revenue considerations are prominent, an alternative method of analysis such as net benefit or net present value may be preferred.
The economic problem is to identify the best capital investment from a set of possible alternatives. Selection is made on the basis of a systematic analysis of expected costs, and revenues if they differ, over time for each project alternative.
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