The company needed capital to buy stuff...to eventually produce more capital or cash as it grew...up.
Invested capital is just the cash invested into a project designed to produce more capital in the future.
See: Discounted Cash Flow. See: WACC. See: A-Round. See: B-Round.
Think: our proverbial tractor smelting plant that costs $100 million...and its high-techness will allow Tractors-R-Us to produce an excellent tractor for $22,000 instead of $28,000.
Related or Semi-related Video
Finance: What is Paid-In-Capital/Surplus...11 Views
finance a la shmoop what are paid in capital and capital surplus all right
well first you start with the original thousand bucks grandma gave you or [Someone taking a check]
rather invested in you and that's an important difference to buy 10 percent
of your lemonade business and note the import therefore defining paid in
capital that grandma is buying a slice of your lemonade stand pie representing [Piece of the pie chart is highlighted]
10 percent ownership of your company thousand bucks for ten percent she's not
giving you a low interest rate loan despite her career as a collection agent [Grandma holding a rolling pin and threatening someone]
for the mob so the thousand dollars is equity aka
ownership that capital is paid in and it's likely that in order to build the
16,000 lemonade stand stores that you dream of you will need to attract other [Lots of lemonade stands appearing]
investors who will then pay in more capital to own incremental percentages [Investors handing over cash for equity]
of your business as your own original hundred percent ownership when you
founded it it's diluted down to a sum much smaller number than the 90 percent [The kids piece of the pie chart gets smaller]
you own after Grandmama's grand but things go well and it turns out
amazingly that you didn't need to sell anymore equity in your company you were
able to grow by taking short-term loans which you then paid off by charging five [Lemonade stand taking loans from a brokerage, investors and a bank]
bucks a cup for the Absinthe kicker it was a huge hit among third graders so [Kid looking tired]
after four years you found yourself with a hundred ninety six thousand dollars in
cash in your lemonade stand bank account yes you had five grand worth of cups in [ATM showing the balance]
inventory a bunch of sugar and some other things yes they are probably
convertible quickly into cash but if you converted them quickly you would also [Liquid stamp]
suffer a massive discount in pricing because while semi used cups or at least
ones that have previously been sold even if they're in their original packaging
while they probably don't do well on eBay so for your purposes in assessing [Cups for sale on eBay]
your own capital surplus here you're going to ignore inventory and all of the
other elements that in a big or real company well you'd have to account for [Inventory items being crossed out]
at least consider when you thought about how liquid your company was and yes [Kid thinking of lots of cash floating on the sea]
that's not a reference to the product you actually sell so of that hundred
ninety six thousand dollars well one hundred ninety five grand of that
cash was capital surplus or just capital aka cash that came in the form of [Capital surplus calculation]
after-tax profits that you kept in your company as you grew it from a nothing to
something now that's how you make the most of your seed money [A hole being dug and seeds being planted]
