Introduction to this document

Capital investment proposal

Capital investment in new equipment or facilities is usually a significant sum. It could be funded from internal resources or it may require a new source. In either case, a well thought through proposal will ensure that you have considered all the angles properly. A capital investment proposal document will help pull all these elements together.

The financials

The factors you need to report on in your Capital Investment Proposal depend on economic circumstances, any competing needs for funding in the business and how critical the investment is to the company. For example, investing in a new production line for your top product may be more critical right now than adding new vehicles to your distribution fleet.

An investment will be feasible if the net returns on it are sufficient to repay the capital invested and any loan interest. You can use the NPV (net present value) to calculate the return on the investment in today’s money. To do this, you need to discount each cash inflow/outflow back to its present value (PV) using the following formula: Rt (1+i)t; where t is the time of the cash flow (e.g. 1 for one year later), i is the discount rate (e.g. 10%) and Rt is the net cash flow (the amount of cash, inflow minus outflow) at time t. You then sum the individual PVs to give the overall NPV of the investment. You do not need to discount any cash flows within the first year. You should only recommend an investment if it has a positive NPV.

Include in your proposal a calculation of the investment’s NPV based on future cash flows. To be acceptable, the NPV should be greater than zero. Supplement this by explaining the business need and risks involved. Sheet 2 of our capital investment proposal gives an example of such an NPV presentation.

Other information

In addition to the financial information and analysis, you will need to add narrative in your capital investment proposal to justify it, particularly where external funding is required. You should describe: (1) the business need that the capital investment is expected to satisfy; (2) any dependencies with other capital equipment, for example, a new production line may require alterations to factory layout; (3) any resources that would be required for implementation, for example, deploying your maintenance team for installation; and (4) any risks related to the capital investment project, for example, what level of sales is required for a new production line to break even.