Let us suppose your company's weighted-average cost of capital is 12%. It is believed that the company should make a particular investment, but its internal rate of return is only 10%. What logical arguments would you use to convince your senior to make the investment despite its low return?
When we capitalize these costs as opposed to expensing them then the -
1. Net income (1st year) is higher as capitalizing costs only delays expense recognition for future periods.
2. Net income (future years) is lower as overall net income for both capitalizing and expensing is the same.
3. Book Value of equity is higher as book value equity is affected from retained earnings from income statement.
4. Cash flow from operating activities is higher
5.Cash flow from investing activities is lower
We must note that certain investments may increase the intangible value of assets of the company. For instance we might have to perform a marketing campaign that might not make any money, but helps to create brand awareness and identity which will help boost sell products in the future. I will convince my senior that future benefits will outweigh current costs because of new expanding markets that haven't developed yet.