Create Cost of Capital Method for Fixed Assets

This document explains how you create a method for calculating cost of capital for the fixed assets in which the company has invested.

The method controls the calculation of the cost of capital resulting in an internal interest.

Outcome

A method for cost of capital calculation is defined, based on either the acquisition cost, the reacquisition cost or the net value of the asset.

You can connect the cost of capital method to a fixed asset type in 'Fixed Asset Type. Open' (FAS075) (optional). The method is then automatically proposed when you enter a fixed asset with that asset type in 'Fixed Asset. Open' (FAS001).

You can also connect a method directly to a fixed asset in 'Fixed Asset. Open' (FAS001).

When a cost of capital method is connected to one or several assets, the cost of capital is automatically calculated for the asset(s) when running 'Cost of Capital. Calculate' (FAS120).

The parameter file (CSYTAB) is updated.

Before you start

  • If net value should be used, a depreciation type must be defined in 'FA Depreciation Type. Open' (FAS050).
  • If reacquisition cost should be used, a value type must be defined in 'FA Value Type. Open' (FAS060).
  • If reacquisition cost should be used and calculation according to the index table is chosen, an index table is defined in 'Index Table. Calculate' (CRS481/B).

Parameters to Set

Program ID/Panel Field The field indicates …
(FAS090/E) Cost of capital – percentage rate

…the annual percentage rate (APR) for cost of capital calculations.

The APR is decided upon by the company on an annual basis and is the basis for calculating the cost of capital.

(FAS090/E) Cost of capital budget

…the cost of capital budget method; that is, a budget prognosis used for the coming year (optional).

The field enables you to enter another percentage rate than the actually used APR (above). This could be used, for example, due to expected changes in market interest rates.

If you leave this field blank, the APR you entered in 'Cost of capital – percentage rate' (above) is automatically proposed in this field.

(FAS090/E) Base for cost of capital calculation

…the base alternatives for calculating cost of capital.

The alternatives are:

1 = Acquisition cost; that is, the amount that the company originally paid for the asset

2 = Reacquisition cost; that is, the amount the company has to pay to buy a new asset or the value the company would receive if they sold the asset today

3 = Net value; that is, the acquisition cost minus the depreciated amount.

Net value is used if you do not want to purchase this asset again later and only want to calculate the internal interest for the asset based on the net value according to the accounting of the company.

(FAS090/E) Period type

…when the depreciation should start.

The alternatives are:

1 = Purchase period

2 = Manufacturing period

3 = Activation period

4 = Building permit period.

(FAS090/E) Value type

…the value type that should be used for calculating the cost of capital.

Value types are used to keep track of any possible value you need to follow up on regarding a certain asset type.

Value types must be defined in 'FA Value Type. Open' (FAS060) before they can be used.

(FAS090/E) Depreciation type ID

…a set of rules for depreciating the fixed asset.

Depreciation types are used to define different kinds of depreciation.

The depreciation types must be defined in 'FA Depreciation Type. Open' (FAS050) before they can be used.

(FAS090/E) Index table

...the index table used to calculate a present or future value based upon a historic value.

The index table allows you to make the calculation per period.

You are required to connect the calculation method for the reacquisition cost to an index or a yearly percentage (see below).

(FAS090/E) Yearly percentage – indexation …the percentage used to calculate a new reacquisition cost per year.

Follow These Steps

Define Basic Data for Cost of Capital Method

  1. Start 'Cost of Capital Method. Open' (FAS090/B).

  2. Fill in the method ID. Click 'New'.

    The method ID can consist of up to three alphanumerical characters.

  3. On the E panel, fill in the description (required) and name.

  4. Enter the annual percentage rate (APR) for cost of capital calculations and cost of capital budget method (optional).

  5. Select one of the following alternatives for cost of capital base:

    • 1: 'Acquisition cost', go to step 6
    • 2: 'Reacquisition cost', go to step 7
    • 3: 'Net value', go to step 8.

    Acquisition Cost

  6. Enter period type for depreciation (required). Press Enter to finish.

    Reacquisition Cost

  7. Enter value type and period type for depreciation (required). Enter Index table or Yearly percentage - indexation. Press Enter to finish.

    Net Value

  8. Enter depreciation type ID and a period type for depreciation (required). Press Enter to finish.

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