EQUIPMENT Definition

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EQUIPMENT is generally determined by the meeting of three tests: a. Has an acquisition cost that is equal to or more than the cost hurdle for classifying capitalized assets. Includes: Invoice amount, sales tax, freight costs, installation costs, costs for the initial complement of supplies needed to place the asset into service, accessory and auxiliary apparatus necessary to make it usable for the purpose for which it was acquired; less trade or trade in discounts and/or educational allowances Excludes: Federal Excise tax, duty, insurance, maintenance and warranty costs; and, b. Has a useful life of two or more years If the item will not have a useful life of more than two years it is considered expendable material, even if it costs more than the level for determining a capital asset; and, c. Is a stand alone item. The item is not permanently attached to or integrated into a building or structure.

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CASH-ON-CASH RETURN is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage. It is often used to evaluate the cash flow from income-producing assets. It is generally considered a quick napkin test to determine if the property qualifies for further review and analysis. Cash on Cash analyses are generally used by investors looking for properties where cash flow is king, however, some use it to determine if a property is under priced, indicating instant equity in a property. It is calculated: Annual Before-tax Cash Flow divided by the Total Cash Invested.

EARNINGS RETENTION is the proportion of net income that is not paid in dividends. A firm earning $80 million after taxes and paying dividends of $20 million has a retention rate of $60 million/$80 million, or 75%. A high retention rate makes it more likely a firms income and dividends will grow in future years.

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