Meaning of Investment Calculation

What is the investment calculation? Various investments are required in companies, for example to acquire new or renew systems or to expand production facilities. Before an investment is made, it must be checked whether it has any real benefit for the company. The investment calculation (also called investment calculation) is the right tool for this.

Definition of the investment calculation

According to Bittranslators, the investment calculation is the mathematical method for checking investments for their profitability. An objective analysis of acquisitions is possible with the investment calculation method. The investment calculations are used for the financial evaluation of planned investments. The investment calculation is possible with different procedures, a distinction is made between the static and the dynamic calculation. Part of the static investment calculation

  • Cost comparison calculation
  • Profit comparison calculation
  • Profitability comparison calculation
  • Amortization calculation .

For this method, no compound interest effects and only one period are taken into account. In the static investment calculation, the various payments at a point in time are not determined, but an average value of all expected costs or sales is formed. The static investment calculation is therefore not suitable for long-term considerations, but it can certainly be used for short-term or rough considerations.

The dynamic investment calculation includes the net present value method, the internal rate of return method, the annuity method and the terminal value method. With the dynamic method, the times of the inpayments and disbursements are included in the calculations in order to obtain more meaningful calculations. In order to create a holistic perspective, all variants should be used for the calculation. Only then will you get a complete picture and be able to make a high-quality decision for your own company. The dynamic calculation methods are significantly more complicated and have complex formulas. However, only they provide a solid basis for a good management decision.

Functions of the investment calculation

With the investment calculation, investment decisions with regard to the monetary company goals should be founded and prepared. The cash flow generated by the investment project is determined and converted to a target, for example profitability, condensed. Using this target value, the advantages, i.e. the benefits, of the investment can be assessed. With the investment calculation, the absolute advantage, the relative benefit and the replacement problem can be shown. The absolute advantageousness expresses whether an investment project makes a positive contribution to the fulfillment of the company’s monetary goals. It is checked whether the investment project can be realized financially. If the target contribution from this project is negative, the investment should not be carried out.

The relative benefit must be determined when several investment projects are pending, but a company cannot finance all planned projects at the same time due to limited resources. Exactly the project that provides the most benefits for the company is selected. The investment calculation checks, taking into account the provisions of the optimal service life, whether an existing system should be replaced, taking into account financial aspects. In practice, these questions of the investment calculation are often closely linked, various investment projects serve at the same time as replacement and expansion. If a company’s resources are scarce, alternative investment projects must be sought.

Examples for the investment calculation

The investment calculation is to be explained using an example of the dynamic investment calculation. A company has to choose between two investment objects, each of which has a useful life of five years. A capital investment of approx. 50,000 euros is required for both properties. For one property, annual income surpluses of 15,000 euros are expected, for the other in the first to fifth year of 15,000 euros, 14,000 euros, 15,000 euros, 20,000 euros and 15,000 euros. The decision is in favor of the second property, as higher income surpluses are achieved.

Another example is a truck trailer with an acquisition value of 40,000 euros that requires repairs of 8,000 euros after eight years. At the end of the economic useful life of twelve years, the residual value is still 5,000 euros. In each year of the period of use, an income surplus of 10,000 euros is expected. It is considered whether an investment is worthwhile if a new trailer costs around 10,000 euros more. The net present value method is used to calculate whether an investment in a new trailer is worthwhile. The calculation shows that this investment is worthwhile. Dynamic investment calculation is a complex process because compound interest has to be taken into account.

With the help of Excel, the calculation is made much easier. Other programs also do a good job here. You can alternatively use Open Office or Numbers for the Mac. However, once you have worked out a suitable comparison calculation, you can use it with only minor adjustments for all upcoming and future investment projects. That saves time when the benefit calculation is always on the agenda.

Investment calculation: interaction with financing

However, the investment analysis in no way “cares” about the source of funds for an acquisition. This is organized by the financing . Here the controllers and decision-makers decide which type of capital is used for an investment. Investments that have a positive effect on the company based on a computational analysis can be financed in various ways.

Equity and debt capital can be used here. The calculation of whether an investment pays off for the company is completely detached from considering how it should be financed. The only exception: if a comparison is made between two assets for which separate financing is required (for example due to government subsidies), these framework conditions are of course also included in the investment calculation.

investment calculation