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A capital cost is an ammount of money that the owner of a business, spends that he/she will not get back. EG: Paying hydro bills, etc.
A capital investment is spending money on something that can, in turn, make you money someday. Eg: Purchasing a building or vehicle for your business.
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What is the difference between a chosen investment and one that is passed up?
opportunity cost
Why is the marginal cost of capital more relevant to making investment decisions than the historic cost of capital?
because of deprecation
How would you describe the cost of capital?
The minimum rate of return the company must earn to be willing to make the investment. It is the rate of return the company could earn if, rather than making the capital investment, it invested the money in an alternative, but comparable, investment.
Relation between marginal efficiency of capital and marginal efficiency of investment?
MEC is the highest rate of return expected from an additional unit of capital stock over its cost. MEI is the expected rate of return from one additional unit of investmeni.
What is the marginal revenue of capital?
The marginal revenue of capital refers to the additional revenue generated from employing one more unit of capital in the production process. It is an important concept in economics, as it helps firms determine the optimal level of capital investment. If the marginal revenue of capital exceeds the cost of using that capital, firms are incentivized to invest further; if it falls below that cost, they may reduce their capital investment. Ultimately, it helps in assessing the efficiency and profitability of capital utilization.
What is the difference between ROI and ROIC?
ROI, or Return on Investment, measures the profitability of an investment relative to its cost. ROIC, or Return on Invested Capital, evaluates the efficiency of a company in generating profits from its invested capital. In summary, ROI focuses on the return on the initial investment, while ROIC considers the return on all capital invested in the business.
What is the central issue when deciding to invest in cost savings or revenue enhancing capital investments?
The central issue is increasing the difference between revenue and cost; the result must be sufficient to justify the investment.
What is the difference between a chosen investment and one that is passed up?
opportunity cost
What is the difference between cost basis and adjusted cost basis, and how do they impact the calculation of capital gains or losses?
The cost basis is the original price paid for an investment, while the adjusted cost basis includes any adjustments made to the original cost. These adjustments can include things like dividends, stock splits, or capital improvements. The adjusted cost basis is used to calculate capital gains or losses when selling an investment, as it affects the amount of profit or loss realized from the sale.
How do you explain cost of capital and its types?
Explain the term cost of capital and its importance in investment decision
Why is the cost of capital concept so important?
Cost of capital is cost of debt and cost of equity. The concept of cost of capital is important as it depicts the opportunity cost of making a specific investment.
What is the difference between returns and profit?
return is calculate against investment. profit is calculte against cost.
Why do you use the overall cost of capital for investment decisions even when only one source of capital will be used?
The overall cost of capital is the cost of the opportunity to make a certain investment. A financial manager uses the overall cost of capital as a way to gauge the rate of return of one investment over another.
Why is the marginal cost of capital more relevant to making investment decisions than the historic cost of capital?
because of deprecation
How can the CAPM be used to estimate the cost of capital for evaluating real investment decisions by a firm?
C.A.P.M describes the relationship between beta, market risk and expected return of the investment. In order to use the CAPM to estimate the cost of capital for this investment decision, we need to historical data, extract their levered beta, determine the appropriate manner to average them, and apply the resulting risk to the investment's CAPM.
What is the difference between rate of return and return on investment?
The rate of return is a percentage that shows how much an investment has gained or lost over a specific period, while the return on investment is a ratio that compares the profit of an investment to its cost.
What is its link with cost of capital?
The cost of capital refers to the required return necessary to make an investment worthwhile, representing the opportunity cost of using funds for a particular investment instead of alternative options. A company's cost of capital is influenced by its capital structure, which includes debt and equity financing. Changes in the risk profile of a business, market conditions, or interest rates can affect its cost of capital, impacting investment decisions and overall valuation. Ultimately, a lower cost of capital can enhance a company's ability to pursue growth opportunities and maximize shareholder value.
