Investment In Fixed Assets

Course : Managerial Finance Lecture : Marc Credit Hours : 3 Credits Semester Sessions : 3 Semester, 2021/2022 Session Prepared By : Kenzo LECTURE NOTES INVESTMENT IN FIXED ASSETS Funds required by each company Generally used to purchase current assets assets) and fixed assets (fixed assets). For industrial companies most of their wealth embedded in fixed assets, otherwise trading companies most of his wealth is embedded in the form of liquid assets. The company invests in current assets and fixed assets conceptually there is no difference, namely in the hope of getting the funds back invested in larger quantities, The difference lies in the recovery period the invested funds. Usually funds invested in current assets can be obtained.received in a faster time, a maximum of 1 year. Meanwhile, funds embedded in fixed assets are term.recovery time is more than 1 year. Therefore, A company's investment in fixed assets is also called investment long term, so it requires serious attention company leaders, remember this because: 1. The funds used will be visible over a certain period of time long, this will affect the provision of funds for smooth company operations. 2. This investment is usually linked to sales forecasts in the future. Because it's an internal error estimates that sales will result “over investment” or “under investment”, where are the conditions both of which will be detrimental to the ccompany 3. The funds used usually include sufficient amounts large, therefore before a decision is taken to investing funds in fixed assets, it is necessary careful and precise planning. 4. Errors in decision making, will resulting in losses for the company. Investments in fixed assets can be made in: form : 1. Replacement Investment. The decision regarding replacement investment is due to assets are old or obsolete, due to economic considerations must be replaced with a new one. 2. Investment in additional capacity. The decision regarding additional capacity was due to proposal to add new machines due to factory expansion or opening of a new factory. 3. Investment in adding new product types. Investment decisions due to plans to build a new factory, because there is produ diversification, so it must exist replacing machines or adding facilities. a. Understanding Cash Flows An investment proposal always contains 2 (two) types cash flow (cash flows), namely: 1. Cash out flows are cash outlays which are costs investment. 2. Cash in flows, namely cash income which is the result of investment, which is often also called proceeds. 1) Cash Out Flows Cash out flows can be divided into 2 groups: a) Capital expenditure is expenditure that provides benefits in the long term. Such a purchasing machines, buildings and so on. b) Revenue expenditure is considered expenditure cost. Such as material costs, labor and others. In the sale of assets/fixed assets it is possible to occur 3 circumstances, namely: 1. Assets are sold at book value. 2. Assets are sold above book value. 3. Assets are sold below book value. b. Ranking of Investment Proposals The capital budgeting process is basically for answer two questions, namely: 1. Which one to choose among several investments? not related to each other. 2. What is the total number of projects that must be accepted Among the many methods used for assessing investment proposals is as follows: 1. Payback Period Method 2. Net Present Value Method 3. Internal Rate of Return Method 4. Accounting Rate of Return Method 5. Profitability Index Method Please note that the payback period method, net present value and internal rate of return in the calculation using the basis of proceeds (net results), while the method accounting rate of return uses the basis of profit after tax. 1. Payback Period Method Payback Period is defined as the number of years necessary to return the investment..This means that this method shows a certain period of time required to recover investment by using proceeds (net results) as a tool the calculation. The disadvantages of this method include: 1. Ignoring the time value of money. 2. Ignore the proceeds obtained after payback period.