Capital Investment Decision is probably the most important decision for an organization. i. Explain the meaning of
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Question:
- “Capital Investment Decision is probably the most important decision for an organization”.
- i. Explain the meaning of the above statement clearly stating the meaning and the importance of capital investment decisions. What are the other key finance decisions related to capital investment decisions?
- ii. Biosis Pty Ltd (BPL) has the opportunity to invest in two mutually exclusive investment projects. Project “A” would cost $250,000 and provide net after-tax cash benefits of $70,000 a year for five years. Project “B” would cost $150,000 and provide net after-tax cash benefits of $47,000 a year for five years.
- iii. Critically explain the limitations of using Accounting Rate of Return (ARR) and pay-back period (PBP) as project evaluation techniques and explain why IRR is useful to compare projects.
BPL’s cost of capital is 12%. For each project, compute the net present value (NPV), internal rate of return (IRR) and pay-back period (PBP). Recommend which project should be accepted.
Related Book For
Managerial Economics A Problem Solving Approach
ISBN: 978-1133951483
3rd edition
Authors: Luke M. Froeb, Brian T. McCann, Mikhael Shor, Michael R. War
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