Capital Investments
Companies make capital investments to earn a return. This is like individuals wanting to "make" money when they invest in stocks and bonds. The amount of money "made" or "lost" is measured as the investment's rate of return. When making an investment, the expected rate of return is determined by the amount, timing, and riskiness of the funds expected from the investment.
Rate of Return
Amount. An investment's rate of return is expressed as a percentage. For example, if a company invests $1,000 and expects to get back $1,100 one year from today, it expects to earn 10 percent ((1,100 1,000)/1,000). If the company expects $1,200 (instead of $1,100), it expects to earn 20 percent. So a rate of return depends first on the amount of money expected back from the investment.
Timing. Just as getting more money produces a higher rate of return, getting the money sooner also produces a higher rate of return. If a company earns 10% in six months that's a higher rate of return than 10% earned in one year. So an investment's rate of return also depends on when the company expects to get the money back.
Risk. For most capital investments, the amount of money and/or the time at which the company expects to get it back are uncertain.
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