Finance illustration Finance theory

Capital investment and productivity

Capital investment involves ploughing financial resources into physical resources that will generate wealth for a business over time.

For example, a financial resource could be a loan or finance raised from shareholders. This finance can then be used to invest in a new factory building or a new automated production line. Utility companies invest vast sums of money in physical capital such as pipelines to pipe gas from the gas fields to where it can easily be distributed to the final consumer in an appropriate form.

Making an investment involves weighing up the risk against the return. The risk needs to be acceptable to relevant stakeholders such as shareholders, as does the financial return on the capital investment.

Investment makes it possible to increase productivity i.e. the outputs produced from given quantities of inputs. For example, building a modern pipeline from a high yielding gas field will increase the productivity of capital i.e. output per £ invested, as well as increasing productivity of labour and other resources employed by a company.

Capital investment

Ideally capital investment should yield greater returns at lower unit costs - enabling what is referred to as economies of scale. Productivity is measured in units of output produced from given units of input, or in terms of revenue per unit of input employed.

The term capital is used in business both to refer to financial capital - e.g. a business has a sum of capital to invest, and to physical capital i.e. the amount of machinery, equipment, buildings etc that a business has.

Financial capital can be converted into physical capital, and the output of physical capital is then converted into a financial stream of returns.


Supporting Documents

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