The Use of Capital Budgeting Models in Utility Estimation Essay

The Use of Capital Budgeting Models in Utility Estimation - Essay Example Three key terms are incorporated into the preceding description of alternative choice problems: cost, revenue, and investment. If the applicability of Hunter et al.'s (1988) critique to capital budgeting models of utility is to be fully evaluated, the reader must understand how finance managers and accountants use these terms. Cost refers to the number of resources used for any purpose (Anthony & Reece, 1983). Costs incurred in an accounting period are either assets or expenses. An asset is defined as a cost that yields benefits to the organization beyond the current accounting period (usually 12 months). For example, a machine that is expected to have a useful life of 10 years is classified as an asset because it is expected to produce outputs (such as machined parts) that benefit the organization by bringing in revenue over a long period of time (in this case 10 years). An expense is defined as a cost that yields benefits to the organization only within the current accounting perio d. For example, the cost of electricity for the machine for one month is classified as an expense because the resulting benefits accrue only over the short term. Revenue refers to the inflow of funds that results from the sale of goods and services to the firm's customers. An investment is the acquisition of an asset resulting in a future stream of expected cash inflows (i.e., revenues). For the example of the machine purchase given earlier, parts produced with the machine would be sold to customers, and the resulting stream of revenues would be received over the 10-year life of the machine.