Hello,
I read in Kaplan one of the formulas to compute fixed capital investment is: Ending PPE - beginning PPE + depreciation - gain.
Could anyone help me understand this formula? I am confused behind the intution of this formula.
Thank you!
Hello,
I read in Kaplan one of the formulas to compute fixed capital investment is: Ending PPE - beginning PPE + depreciation - gain.
Could anyone help me understand this formula? I am confused behind the intution of this formula.
Thank you!
PPE account is a balance sheet account. How is this account built at each Financial Statements presentation?
At the beginning of period you have a PPE value, say 1,000. During the period, you may have investment in new PPE, also the current PPE may have depreciated and also the current PPE may have gained value or lost it. So how is PPE at the end of the period? A brief example:
1,000 Beginning PPE
1,150 Ending PPE
Going back to your question, how do we calculate FC Investment from the info above? Let’s derive the book formula:
Ending PPE -/+ Gain/Loss in PPE + Depreciation - Beginning PPE = Investment in PPE
Corroborating numbers:
1,150 - 50 + 100 - 1,000 = 200
Hope this helps!
Change in investment to fixed asset within period = Ending Fixed Asset Balance - Beginning fixed asset balance. Since, PPE fixed assets depreciates (thus lose its value periodically) you have to add back periodical depreciation cost to reach pure investment outlay. Some of assets might be sold within period, thus you should deduct gain/loss to reach an investment outlay. Simple is that.
Just to add to Harrogath’s explanation above.
To easy remember you may write this equation in this manner: ΔFCI = ΔPPE +(D - G)
Thank you for the input. Two followup questions:
Since the FC investment will be used an the initial cash flow in a specific capital project, wouldn’t we have adjust the investment in PPE downward if some of the purchase was made on credit (not all cash upfront)?
Are asset figures on the balance sheet adjusted periodically for the change in value? I never knew long term assets were adjusted for changes in their respective fair values, unless the change was substantial.
I mean, it will be adjusted through changes in WC by change in current portion of long term debt in initial outlay formula:
Initial Investment = Capital Expenditures + Increase in Working Capital − Old Asset Disposal Inflows
Same thing may happen if new asset was financed through governmental or other donation. But in that case, changes in WC would be proceeded through changes in deferred revenue WC position.
They’re adjusted periodically but might be linear if straight line method is used or not linear if other depreciation methods are used. Depreciation has nothing with equipment fair value than with its usable value. Asset revaluation (IFRS) is related to fair value.