LO 11.1Why does a company evaluate both the money allocated to a project and the time allocated to the project?
LO 11.1What is the screening decision?
LO 11.1Your supervisor is on the company’s capital investment decision team that is to decide on alternatives for the acquisition of a new computer system for the company. The supervisor says, “The book value of the existing computer system for the firm that we are considering replacing is nothing but an accounting amount and as such is irrelevant in the capital expenditure analysis.” Does this reasoning make sense? Why or why not?
LO 11.1Ekon owns a small tow-truck business that responds to state patrol requests to tow cars involved in wrecks, as well as to private business requests from customers at various auto repair shops and individuals with stalled autos. Ekon’s business is open 24/7 for 365 days a year. He is starting to see too many repairs on his three trucks, which either means that he loses business or must divert a truck from another area. He is now trying to consider whether it is best to continue use of the current trucks or whether he needs to invest some money in new trucks.
Using the steps for the process of capital decision-making, create an outline with sub-steps that include questions Ekon can use to guide his investigation or considerations of buying new trucks.
LO 11.2What are one advantage and one disadvantage of the payback method?
LO 11.2What is the equation to calculate the payback period?
LO 11.3What is future value and what is one example where it might be used?
LO 11.3What determines the anticipated interest rate payout for an investment?
LO 11.3What is the definition of present value?
LO 11.4Briefly explain how NPV is computed and interpreted.
LO 11.4How is the IRR determined if there are uneven cash flows?
LO 11.5What are the strengths and weaknesses of NPV?
LO 11.5How does the size of the initial investment affect the internal rate of return on the net present value models?