do we include intial cost of investment in fixed costs?
fixed costs
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Hi Yosha,
Please don't mix up these 2 concepts - they really should never be used together.
Think about fixed costs with variable costs. Think about initial costs with annual costs.
Fixed costs occur every year (i.e. equipment maintenace/repair, equipment depreciation, factory maintenace/repair, rent, etc.). Upfront investment costs occur in the first year and are what it costs to setup things (i.e. factory construction, bonds, legal fees, etc.)
If you're thinking about an investment decision/ROI, here's how the logic goes:
Your recuring annual revenues need to be greater than your recurring annual costs...and the difference between these two needs to aggregate to be larger than your upfront investment cost (to a high enough ROI). Finally, your recurring annual costs are broken down into fixed costs AND variable costs.
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No, these are different concepts.
- Typically in cases you want to check the return for your initial investment. So you most likely want to compare your yearly profit with your initial investment.
- The initial investment is a one-off expense, whereas fixed costs are recurring expenses (monthly, yearly...).
Note: D&A is how you turn the initial investment (if it is in fixed assets) into an yearly cost. In most case you will ignore this as you are analyzing the investment from a cash perspective (not an accounting perspective, and in most instances you may also ignore tax impacts).
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exactly thats what i know about the initial costs but in the case they add them together and thats what make me confused