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1867531
IA- static methods
Description
static methods
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ia
university
Mind Map by
so liu
, updated more than 1 year ago
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Created by
so liu
over 9 years ago
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Resource summary
IA- static methods
Cost comparison method
answers to: 1. which project should be realized & 2. what is the optimal replacement time for an already realized asset
choose the one with lowest costs!!!
calculate total costs: variable costs + fixed costs
depreciation: initial outlay/economic life
Average tied-up capital: initial outlay/2 (for calculating interest)
fixed costs= capital costs
if investment sold after the economic life- liquidation!!!
depreciation: (initial outlay - liquidation value)/ economic life
ATC: (initial outlay + liquidation value)/ 2
critical quantity =volume of production which leads to equal costs
fixed c + variab/unit *x = fixed c. + variab/unit *x
lower fixed costs = lower costs before critical quantity
higher fixed costs = lower costs after critical quantity
basics
values represented through costs and revenues
average value of a representative period (not the whole economic life
time value of money not considered
profit comparison method
target measure: average annual profit (profit/period)
average annual profit: annual revenue - annual total costs
absolute profitability = profit greater than zero
relative profitable = the one with the higher profit
critical quantity of output
leads an equal profit of both alternative investment projects
(revenue/unit- variable cost/unit)* x - fixed costs = (rev./u-var.cost/u)* x -fixed cost)
evaluation of the model
acknowledges the fact of different revenues
allows individual project evaluations
impossible to allocate revenues to the projects
usage of average values is questionable
investment assessed only according to the realized profit
average rate of return
target measure is the average rate of return
= ((average profit + average interest)/ ATC) *100
can be used for a single investment or to compare
absolute profitability= average rate of return higher than a given %
relative profitability= investment leads to a higher ARR than alternative investment project
risk premium!! add to the fixed interest
static payback period method
target measure is the time it takes to recover the capital invested to the project
payback period = initial outlay + (if so) liquidation value/ average annual cash flow
absolute profitability= payback period is shorter than the target length of time
relative profitability= investment project has a shorter payback period than alternative investment project
result in years!!
equity financed--> add interest!!!
profit + depreciation + interest = average annual cash flow)
debt financed: average annual cash flow = profit + depreciation
evaluation of the model
advantage: provides some indication of the risk
disadvantage: excludes profits and cash flows after the payback beriod
disadvantage: can't be used for evaluation of long-term assets, difficult to determine an objective acceptable payback period
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