fixed costs

Hi Yosha,

Please don't mix up these 2 concepts - they really should never be used together.

Think about fixed costs with variable costs. Think about initial costs with annual costs.

 Fixed costs occur every year (i.e. equipment maintenace/repair, equipment depreciation, factory maintenace/repair, rent, etc.). Upfront investment costs occur in the first year and are what it costs to setup things (i.e. factory construction, bonds, legal fees, etc.)

If you're thinking about an investment decision/ROI, here's how the logic goes:

Your recuring annual revenues need to be greater than your recurring annual costs...and the difference between these two needs to aggregate to be larger than your upfront investment cost (to a high enough ROI). Finally, your recurring annual costs are broken down into fixed costs AND variable costs.

No, these are different concepts.

• Typically in cases you want to check the return for your initial investment. So you most likely want to compare your yearly profit with your initial investment.
• The initial investment is a one-off expense, whereas fixed costs are recurring expenses (monthly, yearly...).

Note: D&A is how you turn the initial investment (if it is in fixed assets) into an yearly cost. In most case you will ignore this as you are analyzing the investment from a cash perspective (not an accounting perspective, and in most instances you may also ignore tax impacts).