Question

Discuss the elements in capital investment of a company?

Answer 1

The elements of the capital investment used in a company:

Elements of Investment

There are three factors that are considered as elements of investment.

a) Reward

b) Risk and return; and

c) Time

A. Reward

We have seen above that investment is made with the intention to gain profit. Thus, investors, generally, may expend their fund to earn a return on it. The return is known as reward from the investment, and it includes both current income and capital gains or losses which arise by the increase or decrease of an investment.

Let’s say, Ayal has started producing bread in a modern way at Arat Kilo and distributes it to the customers in Addis Ababa. The capital for the investment is Birr 10,000. She invested on the sector with the expectation of profit. Moreover, let us assume that she has got Birr Two thousand within six months of her investment. This is a reward from the investment.

B. Risk and Return

The second element of investment is risk and return. Risk may be defined as the chance that the expected or prospective gains, or profit or return may not materialize. It also includes the fact that the actual outcome of investment may be less than the expected outcome. It is important to note that the greater the variability or dispersion in the possible outcome, the greater the risk will be.

In addition, risk means estimation about the degree of happening of the loss. Risk and return are inseparable. Return is an expected income from the investment. It represents the benefits derived by an investor from his/her investments. The rate of return required by the investor largely depends on the risk involved in the investments. Thus, the investment process must be considered in terms of both aspects of risks and return. Risk can be quantified by using precise statistical techniques. Therefore, risk is a measurable element.

C. Time

Time is the third element of investment. It offers several different courses of action. Conditions change as time moves on and investors should re-e valuate expected return for each investment. An investment could not be materialized within a very short period of time. In other words, investment is of long-term in nature.