THREE KPIS EVERY

BUSINESS OWNER SHOULD KNOW

BEFORE MAKING

NEW INVESTMENT

S

Business owners find it necessary to make capital investments to further the purpose of their business

When to make

capital investmen

ts

Capital investments are made when capacity needs to be increased or expenses can be decreased

Make capital investments knowing your required rate of return

Required rate of return

You should go into an investment knowing how much you will like to get back in return

Your required rate of return is normally tied to the opportunity cost of your money

Capital investment decisions take into

consideration

Fund availability: Are there excess funds to make the investment or will the business have to take a loan

Risk: The risk involved in the investment should also be considered

Capital Investment KPIs

Cash payback period

The cash payback period is the time period it will take to recover the cost of your capital investment

COST OF CAPITAL INVESTMENT/ NET ANNUAL CASH FLOW

It will take as 6.25 years to get back your original investment. This number is neither good or bad. It all depends on your investment requirements and other qualitative factors.

In general, the shorter the cash payback period, the more desirable the investment.

Net present value

The problem with the payback period, is that it does not take into consideration the time value of money

Using the net present value method, cash flow is discounted to its present value. The capital investment is subtracted from the net present value to see if there is a positive or negative return. In general, an investment is accepted if the return is positive.

Internal rate of return

The internal rate of return is the point where your NPV (as discussed previously) is zero

Using excel (formula =IRR(G9:G19)) we can determine the internal rate of return of the problem discussed above as follows

Questions for

thoughts

Do you know your investment return criteria?

Do you know the opportunity cost of your money?

Summary

You must go into investments knowing what you hope to get from it and then using kpis to predict if these investments are likely to meet your criteria

Payback period of must be greater than 50% of

the assets estimated useful life

Required rate of return of

20% based on opportunity cost of cash

Know moreTHREE KPIS

EVERY BUSINESS

OWNER SHOULD KNOW BEFORE MAKING NEW INVESTMENTS

www.mybusinesskpi.com/InvestmentKPIs.html