Blacksacademy
Business Studies
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Subject: Accounting and Finance
Title : Investment Appraisal - Average Rate of Return
The accounting or average rate of return expresses the annual increase in profits resulting from an investment as a percentage of the capital cost of the investment.Method
1. Estimate the cash flow (net of operating costs) from the investment over its life-time
2. Make a total of this cash flow
3. Deduct the cost of the investment (that is, deduct the capital cost)
4. Divide this net cash flow by the cost of the investment.
5. Divide the resultant ratio by the expected life, and express the result as a percentage (that is, by multiplying by 100)
Effectively, what we are doing in calculating the Accounting Rate of Return, is obtaining a percentage return on an investment that is comparable to a bank rate of interest. In this above example we see that the investment is expected to return 16.9%. If the bank rate of interest is, say, 5%, this would appear to be an attractive investment. However, that is assuming that the return is guaranteed, in other words, this accounting rate of return that we have just calculated does not take risk into account. Additionally, it does not account for the depreciation of money owing to the time-value of money.
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Subject: Accounting and Finance
Title : Cost, Profit, Contribution, Break Even Analysis
Capital Expenditure and Costs Business is conducted by exchanging liquid assets for fixed assets and vice-versa.A first type of payment occurs when we exchange cash or another liquid asset for such things as property, machinery and vehicles. These are material assets that enable us to make things.
A second type of payment occurs when we purchase such things as raw materials, and employ people to operate the machines, answer telephones and the like.
Rent is an example of this second type of payment. We may decide to hire rather than buy a photocopier. The rent on the photocopier must be paid for, and we pay rent for the use of the photocopier. The first type of payment is called an investment, and the second type of payment is called a cost. Investments increase the material, that is, fixed assets, of the person buying them. The owner has an item that can be used as a means of production.
Investment in such items is called capital expenditure
1. What is the distinction between fixed and liquid assets?
The most liquid asset is cash. A liquid asset can be used to pay a bill. The more liquid an asset the more readily it can be exchanged for cash. Fixed assets are those that take time to be sold. They cannot be exchanged immediately for goods and services. Factories and vans are examples of fixed assets.
2. Why is business conducted by exchanging fixed assets for liquid assets?
Money is in itself unproductive. It does not make anything. So cash (the ultimately liquid asset) must be used to by other assets that can be productive, such as machinery. These fixed assets are used in conjunction with other inputs – labour and raw materials – so make goods and services that can be sold for cash.
Hence liquid assets are exchanged for fixed assets, which produce goods and/or services that result in sales, bringing in further liquid assets.
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