Publish On: 2019-04-23


Total Post: 29

Question: Evaluate the procedure of capital investment

Reply On: 2013-08-30


Total Post: 8

ANS: Evaluate the procedure of capital investment

Strictly speaking, capital investments should include all those expenditures, which are expected to produce benefits to the firm over a long period of time, and encompass both tangible and intangible assets. Thus R&D (research and development) expenditure is a capital investment. Similarly, the expenditure incurred in acquiring a patent or brand is also a capote; investment. In practice, a number of companies follow the traditional definition, covering only expenditures on tangible fixed assets as capital investments (expenditures). The Indian companies are also influenced considerably by accounting conventions and tax influenced considerably by accounting conventions and tax regulations in classifying capital expenditures. Large expenditures on R&D, advertisement, or employees training, which tend to create valuable intangible assets, may not be included in the definition of capital investments since most of them are allowed to be expensed for tax purposes in the year in which they are incurred. Form the point of view of suing decision-making, these expenditures should be treated as capital investments and subjected to proper evaluation.

A number of companies follow the accounting convention to prepare asset wise classification of capital expenditures, which is hardly of much use in decision-making. Some companies classify capital expenditures in a manner, which could provide useful information for decision-making. Their classification is (i) replacement, (II) moderbusatuib, (ii) expansion, (iv) new project, (v) research and development, (vi) diversification, and (vii) cost reduction.


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