Question

Explain how you would attempt to calculate expected "recurring" AND "non-recurring" economic benefits to present value for a capital project (e. g., new plant or equipment)
How would you incorporate the relevant risk factors for that project in to your calculations?

Answer 1

: Recurring cost is generally consiered under Revenue Expenditures, which is further classified as:

- Expenditures for generating Revenue: expenses on ongoing operational costs of running a business, and thus are essentially the same as operating expenses. These expenses are tax deductible in the same year.

- Expenditures for maintenance of revenue-generating assets include the ordinary repair and maintenance costs that are necessary to keep the asset in working order include repairs and maintenance as well as repainting and renewal expenses.

Revenue expenditures include the operational costs of running a business.. Revenue expenditure can be forecasted using life cycle of product and using financial ratios like operating margin trend, Amortization and Depreciation, By analyzing each ratio of growth = Total Asset Turnover * Net Income Margin * ( 1+ (Debt / Equity)

-Non- Recurring cost is generally consiered under Capital Expenditure: Capital Expenses are for the acquisition of assets, intended lo be permanently used in the business for the purpose of earning revenue.

Esitmates can be done by Net Present Value of growth opportunity:

NPVGO = Cost of investment [(profit margin or rate of return on acquisition-growth rate) / (cost of capital-profit margin or return on acquisition)]