fixed costs

Question

do we include intial cost of investment in fixed costs?

Answer 1

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.

Answer 2

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).