Types of Capital Investments Made by Companies

Capital investments are undertaken to either maintain the existing business or/and grow it. There are four main types of capital investments:

1. Going concern (or maintenance) projects.
2. Regulatory or compliance projects.
3. Expansion projects.
4. Other projects.

While growth projects and other projects are initiated to develop a firm strategically, going concern (or maintenance) projects and regulatory or compliance projects ensure business continuation.

Business Maintenance

Going Concern Projects

These are projects required to sustain present operations, keep a firm at its current size, or boost business efficiency. Infrastructure improvement is an example of a going concern project. Firm managements easily assess going concern projects since the expenses they attract are mostly lower compared to the production or business interruption costs that may arise from failure to invest.

Managers frequently attempt to align financing to an asset’s lifespan to pay for these projects. For instance, to finance equipment replacement with a 20-year projected useful life, a business may issue a 20-year bond.

Corporations do not disclose capital expenditure costs related to going concern projects in financial statements. Analysts often use the depreciation and amortization expense shown on the income statement as a proxy for going concern capital expenditure.

Regulatory or Compliance Projects

These projects are usually undertaken due to a requirement by a governmental agency, insurance company, or some other external party. They often do not generate revenue for a company. Instead, however, they generate regulatory or compliance expenditures. This can be an obstacle to entry into a market, which could be advantageous to incumbents. Nevertheless, in some instances, it may be more prudent to shut down part of the business related to the project, e.g., factory pollution control installation.

Business Growth

Expansion Projects

Projects that increase a firm’s size generally come with higher levels of risk and uncertainty than going concern projects. An example would be a merger and acquisition. There are two major risks with acquisitions: the difficulty in integrating business operations of the acquirer and the target. In addition, there is the risk of overpaying.

Other projects

Projects beyond a company’s traditional business areas include high-risk investments and new growth efforts, e.g., innovation projects. These initiatives are probably on the riskier end of the capital investment spectrum.

 Question

Which of the following projects is most likely considered the riskiest?

1. Other projects.
2. Regulatory projects.
3. Going concern projects.

The correct answer is A.

Other projects are considered the riskiest. These projects are beyond a company’s traditional business area and include high-risk investments and new growth efforts, e.g., exploration investments into new innovations.

B is incorrect. Regulatory or compliance projects are undertaken due to a regulator or government agency requirement. They do not generate any revenue for a company. However, it incurs compliance expenditure.

C is incorrect. Going concern projects are required to sustain present operations. This involves keeping the firm at its current size or boosting efficiency. These projects are not risky since they are already in operation.