Sustaining Capital Reinvestment

Posted in Finance, Accounting and Economics Terms, Total Reads: 4284
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Definition: Sustaining Capital Reinvestment

Sustaining Capital Reinvestment refers to the process of periodically investing capital into the business to maintain the current level of operations. The investment amount is net of the present value of the income tax reductions available (known as the tax shield)

Example:

XYZ Ltd. generated after tax profit of $ 50 million in its first year of operation. Three to four good upcoming projects came the company’s way, which required an investment of $ 85 million in the business operations. Since the retained earnings of the business were not sufficient, an additional $ 35 million was added as an outlay into the business to sustain operations. So, this $ 35 million is called the capital reinvestment.

 

Sustaining Capital reinvestment is deducted generally during the computation of the annual cash flows (CF) while determining the value of a business, since it is the amount that is re invested to sustain operations.


For Example:

Rajput Inc. has an after tax income of Rs. 1 crore. The non-cash value received totals to Rs. 40 lakh. The sustained capital reinvestment in the business is Rs. 20 lakhs. If cash flow is to be determined, it can be done as follows:

Income after tax = 1 cr

+ non cash value = 40 lakhs

-sustained capital reinvestment = 20 lakhs

=Total Cash Flow (CF) =Rs. 1 crore 20 lakhs (or) 1,20,00,000

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