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Assessing whether increased maintenance costs will economically change the useful life of an asset. [10] Calculating how much should be invested in an asset in order to achieve a desired result (i.e., purchasing a storage tank with a 20-year life, as opposed to one with a 5-year life, in order to achieve a similar EAC). [11]
The IASB's Framework introduced Capital Maintenance in Units of Constant Purchasing Power as an alternative to Historical Cost Accounting in 1989 in Par. 104 (a) where it states that financial capital maintenance can be measured in either nominal monetary units - the traditional HCA model - or in units of constant purchasing power at all levels ...
(3) Financial capital maintenance in units of CPP in terms of a Daily Consumer Price Index or daily rate at all levels of inflation and deflation (see the original Framework (1989), Par 104 (a)) [now Conceptual Framework (2010), Par. 4.59 (a)] under the Capital Maintenance in Units of Constant Purchasing Power paradigm.
Another approach to choosing the discount rate factor is to decide the rate which the capital needed for the project could return if invested in an alternative venture. If, for example, the capital required for Project A can earn 5% elsewhere, use this discount rate in the NPV calculation to allow a direct comparison to be made between Project ...
Capital costs are fixed, one-time expenses incurred on the purchase of land, buildings, construction, and equipment used in the production of goods or in the rendering of services. In other words, it is the total cost needed to bring a project to a commercially operable status.
continual maintenance of the building exterior and interior and replacement of materials; updates to design and functionality; and recapitalization costs. A key objective of planning, constructing, operating, and managing buildings via TCO principals is for building owners and facility professionals to predict needs and deliver data-driven results.
Therefore, this input to the calculation of free cash flow may be subject to manipulation, or require estimation. Since it may be a large number, maintenance capex's uncertainty is the basis for some people's dismissal of 'free cash flow'. A second problem with the maintenance capex measurement is its intrinsic 'lumpiness'.
M&A analysts likewise apply the first approach, with risk as well as the target capital structure informing both the cost of equity and, naturally, WACC. [6] For the approach taken in the mining industry, where risk-characteristics can differ (dramatically) by property, see:. [13]