Capital investment decisions that involve the purchase of items such as land, machinery, buildings, or equipment are among the most important decisions undertaken by the business manager. These decisions typically involve the commitment of large sums of money, and they will affect the business over a number of years. Furthermore, the funds to purchase a capital item must be paid out immediately, whereas the income or benefits accrue over time. Because the benefits are based on future events and the ability to foresee the future is imperfect, you should make a considerable effort to evaluate investment alternatives as thoroughly as possible. The most important task of investment analysis is gathering the appropriate data. Selecting investments that will improve the financial performance of the business involves two fundamental tasks:
1. Economic Profitability: The purpose of an economic profitability analysis is to determine whether the investment will contribute to the long run profits of the business.
2. Financial Feasibility: Financial feasibility analysis determines whether or not the investment will generate sufficient cash income to make the principal and interest payments on borrowed funds used to purchase the asset.