Revenue Expenditure

Published: 2021-06-29 06:55:20
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Chapter 19 Capital Investment
Taking decisions based on:
. Quantitative
. Qualitative
Expenditure of a capital provides a benefit to an entity for more than a year (long-term).
Revenue expenditure does so for only one year and it has to be renewed if the benefit is to be continued (mid-short term).
All entities would find it difficult to survive if they didn't invest in some form of capital expenditure from time to time, and they certainly wouldn't be able to grow and develop (plant and machinery, f.e.)
So, which one do they have to choose? How should they be financed?
Main methods used in capital investment (CI)

Payback

Estimate how long it would take before a project begins to pay itself.

Discounted payback


2000 / 1.15 = 1739.13
1512.29 / 1.15 = 1512.29


Accounted rate of return (període de recuperació descomptat)

Attempts to compare the profit of a project with the capital invested on it.
ARR = profit/(capital employed) x 100
ARR = (average annual profit before interest and taxation)/((initial capital employed+residual value)/2) x 100

* Profit before interest and taxation.
Disadvantages:
Net profit can be subject of different considerations
The estimation of residual value is difficult
No guidance of acceptable ARR value
Doesn't account the value of the money through the time
Can be useful when different short-term projects are compared.
Net present value (valor total net)

El Valor actual neto también conocido como valor actualizado neto ( en inglés Net present value), cuyo acrónimo es VAN (en inglés NPV), es un procedimiento que permite calcular el valor presente de un determinado número de flujos de caja futuros, originados por una inversión. La metodología consiste en descontar al momento actual (es decir, actualizar mediante una tasa) todos los flujos de caja futuros del proyecto. A este valor se le resta la inversión inicial, de tal modo que el valor obtenido es el valor actual neto del proyecto.
El método de valor presente es uno de los criterios económicos más ampliamente utilizados en la evaluación de proyectos de inversión. Consiste en determinar la equivalencia en el tiempo 0 de los flujos de efectivo futuros que genera un proyecto y comparar esta equivalencia con el desembolso inicial. Cuando dicha equivalencia es mayor que el desembolso inicial, entonces, es recomendable que el proyecto sea aceptado.

Net present value takes into account the time value of the money.

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