Sometimes capital investments with a positive net present value have a negative impact on earnings. For example, investing in certain types of research and development may result in a large expense at the time of investment with the benefits coming a few years (or more) later. Suppose an executive tells you, “I will not approve any capital investment that decreases current earnings, no matter how high the net present value. If our earnings go down, our stockholders are hurt because stock prices will fall, and our managers will be hurt because their bonuses are tied to earnings.” What is wrong with the executive’s statement?

  • CreatedSeptember 19, 2013
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