When companies make major long-term investments such as property, machinery, or equipment (PP&E) that require a huge upfront investment, they would build a capital investment model in Excel to calculate key valuation metrics on the investment. These metrics could include cash flows, net present value (NPV), internal rate of return (IRR), and payback period.
A capital investment analysis is helpful for comparing multiple investment opportunities and determine which is more profitable. A capital investment model normally consists of the following components:
- Revenues, expenses, and profits of the investment by months or years
- The total amount of capital investment and cash flow generated from the investment
- Net present value (NPV) and internal rate of return (IRR) of the investment to determine its profitability
- Payback period, which is the total time it takes for a business to earn back what it invested