a) Albato Ltd has a very refined system for evaluating proposals for investment in fixed assets. Its current assets are relatively uncontrolled and the factors which determine their level have not been analyzed. Questioned on this the managing director has said, Investment in fixed assets is long term and we would therefore be committed to our mistakes for a lengthy period. Current assets are very short term and do not carry that risk. It would in any case be difficult to evaluate the investment in current assets because they offer no financial return as do fixed assets. Do you agree with this argument? Discuss.

b) You have been asked to analyze a project, where the analyst has estimated the return on capital to be 37% over the ten-year lifetime of the project. While the cost of capital is only 12%, you have concerns about using the return on capital as an investment decision rule. Would it make a difference if you knew that the project was employing an accelerated depreciation method to compute depreciation? Why?