Commercial investments are typically made with funds raised from investors (owners and lenders) in order to generate revenue. A business may an investment in equipment, premises, employees, stocks, and so on.
Investment involves making an outlay of something of economic value, usually capital, which is expected to yield economic benefits to the investor at some point in time. Typically, the outlay precedes the benefits (sometimes by a considerable time), and the outlay is one (or a small number of) large amount, whilst the benefits are derived in smaller amounts over a more protracted period.
Investment decisions are of important because of the resources involved, and the duration of the investment. They can also be very specific to the businesses needs, and so of little future value to others. For example, a construction company might invest in the building of a prefabrication factory to provide its projects with a flow of components. This factory may be difficult to sell on to another user because of its location, size, equipment and so on. If the company decides that the investment has not recouped sufficient revenues, they may be forced to shut it down or sell at a loss.
 Evaluation methods
Since investment decisions are very important, they should involve careful assessment of all options (including doing nothing). Some of the more commonly-used methods of evaluating investment opportunities are described briefly below:
 Accounting rate of return (ARR)
This takes the average accounting profit that the investment will generate and expresses it as a percentage of the average investment in the project.
ARR = Average annual profit / Average investment to earn that profit x 100
 Payback period (PP)
This is the length of time it takes for the initial investment to be repaid out of the net cash inflows resulting from the investment, taking into account annual depreciation. Projects that can recoup their costs quickly are economically more attractive than those with longer payback periods.
 Net present value (NPV)
NPV represents the difference between the present value of cash inflows and the present value of cash outflows for an investment. For an investment to be worthwhile it has to yield a positive NPV, meaning that profit will be generated over time as a result of the investment.
For more information, see Net Present Value.
 Internal rate of return (IRR)
IRR is a method of assessing a potential investment’s viability. Anticipated future income and expenditure are used to assess whether or not to proceed. The IRR is the percentage which, when applied to future capital costs and receipts, results in a Net Present Value of £Nil.
For more information, see Internal rate of return for property development.
Residual valuation is the process of valuing land with development potential.
For more information see: Residual valuation.
For more information see: Development appraisal.
For more information see: Discounted cash flow.
 Related articles on Designing Buildings Wiki
- Business plan.
- Cash flow.
- Corporate finance.
- Development appraisal.
- Discounted cash flow.
- Funding options for building developments.
- Investment decision maker.
- Residual value.
 External resources
- 'Accounting and Finance for non-specialists' (3rd ed.), ATRILL, P., & MCLANEY, E., Pearson Education (2001)
Featured articles and news
Identifying sustainable shoreline protection solutions in the face of rising sea levels and storms in the US.
Budget documents state modern methods of construction will be favoured for public infrastructure schemes from 2019.
A walk-through exhibition of an emergency humanitarian shelter is officially opened at BRE's Innovation Park.
How to work safely on a construction site during winter.
Housing is the big winner in Chancellor Philip Hammond's Autumn Budget.
The winner of our BSRIA competition, Tomorrow's challenges in today's buildings, is.... Bob Hendrikx. A big thank you to everyone that took part.
Committee of MPs accuses government of dealing billpayers a 'bad hand' over the guaranteed power price.
In 1992, the Joint Fire Code was first published. What influence does it still have on construction sites today?
"Companies will have to adapt or go out of business" - how are virtual reality and big data disrupting digital construction?
International Well Building Institute and BRE collaborate on multiple levels to advance human health through better buildings.
"The industry has tried moving away from prescriptivism to focus on performance, but maybe that’s no longer working".
Energy from waste and its key role in a low carbon economy.
Sir Ranulph Fiennes was guest speaker at the BSRIA Briefing - Tomorrow’s challenges in today’s buildings.