Finance / August 5, 2018 / Hana Cannon
This focus makes EBIT an especially useful metric for certain applications. For example, if an investor is thinking of buying a firm out, the existing capital structure is less important than the company's earning potential. Similarly, if an investor is comparing companies in a given industry that operate in different tax environments and have different strategies for financing themselves, tax and interest expenses would distract from the core question: how effectively do these companies generate profits from their operations.
The future value of an annuity due formula shows the value at the end of period n of a series of regular payments. The payments are made at the start of each period for n periods, and a discount rate i is applied.
Amortization is like depreciation, which is used for tangible assets, and depletion, which is used for natural resources. When businesses amortize expenses, it helps tie the asset's costs to the revenues it generates. For example, if a company buys a ream of paper, it writes off the cost in the year of purchase and generally uses all the paper the same year. Conversely, with a large asset, the business reaps the rewards of the expense for years. Thus, it writes off the expense incrementally over the useful life of that asset, tangible or intangible.
Economic cost is the combination of gains and losses of any goods that have a value attached to them by any one individual. Economic cost is used mainly by economists as means to compare the prudence of one course of action with that of another. The goods to be taken into consideration are e.g. money, time and resources.
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