Understanding Key Financial Concepts for Businesses

Current Assets Explained

• Securities and Investment: This is the cash that the company should always have to cover not only living expenses but also unexpected costs. Currently, the country's commercial banks have diversified so that you can invest money with tight deadlines.
• Inventory: This refers to a model used to calculate the inventory of raw materials (economic lot).
• Accounts Receivable: This refers to the credit a company typically extends for the sale of its first products when it starts operations.

Understanding the Breakeven Point

The breakeven point is the level of production where sales profits are exactly equal to the sum of fixed and variable costs.

Purpose of Analyzing Results

The aim is to calculate the net income and net cash flows of the project, which are, in general, the real benefits of operating the plant.

Defining Cost of Capital or Minimum Rate of Return

If the Minimum Acceptable Rate of Return (MARR) is defined as: MARR = i + f + if, where i = risk premium and f = inflation.

This means that an investor would ask that an investment be calculated by adding two factors: first, your gain should be such as to offset the inflationary effects, and secondly, you must have a premium or surcharge for risking your money in a certain investment.

Defining Net Present Value and Acceptance Criteria

Net Present Value (NPV) is the value that results from subtracting the sum of the discounted flows from the initial investment.

Evaluation criteria include: if NPV > 1, accept the investment; if NPV < 1, reject it.

Defining Internal Rate of Return and Acceptance

The Internal Rate of Return (IRR) is the discount rate for which the NPV is zero. It is the rate that equals the sum of the discounted flows to the initial investment.

The acceptance criterion used by the IRR method: if the IRR is greater than the MARR, accept the investment.

The Benefit-Cost Method

This method is used to evaluate government investments or those of social interest. Both the benefits and costs are not quantified as in a private investment project but take into account social criteria.