The original purchase 30000 and the cost of the extension 10000 are capital

The original purchase 30000 and the cost of the

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The original purchase ($30,000) and the cost of the extension ($10,000) are capital expenditure because they are incurred to acquire and then improve a non-current asset. The other costs of $900 are revenue expenditure because they merely maintain the building and thus the earning capacity of the building. (6) Investment can be made in non-current assets or working capital. a) Investment in non-current assets involves a significant amount of time between the commitment of funds and recovering the investment. Money is paid out to acquire resources which are going to be used on a continuing basis within the organisation. b) Investment in working capital arises from the need to pay out money for resources (such as raw materials) before it can be recovered from sales of the finished product or service. The funds are therefore only committed for a short period of time. Part 2: The role of investment appraisal in the capital budgeting process (1) Capital investment decisions significantly affect the profits and cash flows due to the : They require huge amounts of fund to be committed for a longer period of time, these decisions usually are irrecoverable The longer the period of investment, the greater the uncertainty and risk relating to the project (2) Capital budgeting is the process of identifying, analysing and selecting investment projects whose return are expected to extend beyond one year. (3) The capital budget will normally be prepared to cover a longer period than sales, production and resource budgets, say from three to five years (4) It should indicate the expenditure required to cover capital projects already under way and those it is anticipated will start in the three to five year period (say) of the capital budget. (5) The budget should therefore be based on the current production budget, future expected levels of production and the long-term development of the organisation, and industry, as a whole. (6) Budget limits or constraints might be imposed internally or externally. (a) The imposition of internal constraints, which are often imposed when managerial resources are limited, is known as soft capital rationing.
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___________________________________________________________________________________________________________________ Page 3 of 13 IPK COLLEGE 1664, JALAN KULIM, 14202 BUKIT MERTAJAM, PENANG TEL : 012-5203212 / 0125113212 / 04-5512588 Subject: Financial Management (DFM1) Prepared by Susan Lim Email : [email protected] (b) Hard capital rationing occurs when external limits are set, perhaps because of scarcity of financing, high financing costs or restrictions on the amount of external financing an organisation can seek. (7) The stage of capital budgeting process as follows: (8) The process of appraising the potential projects is known as investment appraisal . 1. Forecast capital requirements 3. Appraise potential projects 2. Identify suitable projects 6. Compare actual and planned spending, investigate deviations and monitor benefits from project over time 4. Select and approve the best alternative 5. Make capital expenditure
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___________________________________________________________________________________________________________________ Page 4 of 13 IPK COLLEGE 1664, JALAN KULIM, 14202 BUKIT MERTAJAM, PENANG TEL : 012-5203212 / 0125113212 / 04-5512588 Subject: Financial Management
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  • Spring '17
  • JANE KDAL

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