Chapter 2 Flashcards
CAPEX
CAPEX of all natures must be identified for each company in an itemized way
Intangible assets with no real value
non-recurring soft costs and goodwill
intangible assets with real but uncertain and/or unpredictable value:
brands
Tangible assets
Property and equipment
Long or medium term financial assets:
shares or bond portfolios
Accounting treatments
- land is non-depreciable
- intangible assets are non-deprecaible only amortizable
- CAPEX is reported on the b/s in order of increasing liquidity
Depreciation Methods
- Straight line or linear method
- accelerated cost recovery system
Financial Criteria of Investment decision
- Payback period
- Net Present Value
- Internal Rate of Return
The payback period
preferred when there is a predominant preference for the quickest possible return
The net present value
preferred when there is a predominant preference for the highest possible return
The internal rate of return:
preferred when there is a predominant preference for the highest possible return
Purpose of the criteria
CAPEX is always selected on the basis of the same financial criteria of all investment decisions, and allows for a rational, efficient assessment, comparison and selection of each investment
Short term needs and the operating cycle
- The working capital requirements
- Controlling the working capital requirements
Full WCR
Focusing on the balance of all operating assets and liabilities
= operating assets - operating liabilities
Reduced WCR
Focusing on only the balance of the key operating aggregates
= inventories + client receivables - supplier payables
