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Capital Investments And Financial Profitability

Author

Listed:
  • Suzana Baresa

    (University of Rijeka, Croatia)

  • Sinisa Bogdan

    (University of Rijeka, Croatia)

  • Zoran Ivanovic

    (University of Rijeka, Croatia)

Abstract

Economic life of achieving economic and financial effects of an investment opportunity presents the period in which selected investment option remains economically superior from the other alternative investment opportunity. Time period in which the investment project needs to prove its justification, presents an extremely critical factor in the profitability of the investment project, therefore, special attention must be paid to the assessment of the economic and financial time period. The aim of this study was to prove that critical factor in achieving profitability is in direct relation with economic or financial life. The results which arise from this study suggest on the fact that during analysis investor must determine financial life to achieve economic and financial effects of capital investment, because the length of the economic life does not have to match the profitability or with financial efficiency, and that is not appreciated sufficiently in practice. This paper presents examples of calculating the financial profitability of capital investment, using the residual value, ie the discounted residual value and the results of empirical studies that show the difference in preference of life effectuation of capital investment between theoreticians and practitioners in the field of capital budgeting.

Suggested Citation

  • Suzana Baresa & Sinisa Bogdan & Zoran Ivanovic, 2016. "Capital Investments And Financial Profitability," UTMS Journal of Economics, University of Tourism and Management, Skopje, Macedonia, vol. 7(1), pages 49-59.
    • Handle: RePEc:ris:utmsje:0170
    as

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    References listed on IDEAS

    as
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    2. Gryglewicz, Sebastian & Huisman, Kuno J.M. & Kort, Peter M., 2008. "Finite project life and uncertainty effects on investment," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2191-2213, July.
    3. Thomas Pfeiffer, 2004. "Net Present Value-Consistent Investment Criteria Based on Accruals: A Generalisation of the Residual Income-Identity," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(7-8), pages 905-926.
    4. CARLISS Y. Baldwin & Kim B. Clark, 1992. "Capabilities And Capital Investment: New Perspectives On Capital Budgeting," Journal of Applied Corporate Finance, Morgan Stanley, vol. 5(2), pages 67-82, June.
    5. Thomas Pfeiffer, 2004. "Net Present Value‐Consistent Investment Criteria Based on Accruals: A Generalisation of the Residual Income‐Identity," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(7‐8), pages 905-926, September.
    6. Antonio E. Bernardo, 2004. "Capital Budgeting in Multidivision Firms: Information, Agency, and Incentives," The Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 739-767.
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    More about this item

    Keywords

    net cash flow; discounting; economic life; financial life and residual value;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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