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Chapter 26: Q30RQ (page 1464)

Why should both quantitative and qualitative factors be considered in capital investment decisions?

Short Answer

Expert verified

For the most part, quantitative decisions are based on a statistical analysis of the data that has been gathered. Comparatively, qualitative judgments are based on a various algorithms, such as the type and quality of the data, the factors affecting the data, risk assessments, etc.People can make the right choice when they combine the examination of qualitative and quantitative data.

Step by step solution

01

Definition

The spending of money to support the long-term expansion of a business is known as capital investment. The phrase is frequently used about a business's purchase of long-term fixed assets like property and machinery.

02

Examples

The following are some instances of capital investments or capital expenditures that are most typical: 鈥揕and, buildings, furniture for offices, computers, office equipment, vehicles, and patents, among other things.

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Most popular questions from this chapter

Hicks Company is considering an investment opportunity with the following expected net cash inflows: Year 1, \(235,000; Year 2, \)195,000; Year 3, \(125,000. The company uses a discount rate of 6%, and the initial investment is \)365,000. Calculate the NPV of the investment. Should the company invest in the project? Why or why not?

How can spreadsheet software, such as Excel, help with sensitivity analysis?

Match the following business activities to the steps in capital budgeting process.

Steps in the capital budgeting process:

a. Develop strategies

b. Plan

c. Direct

d. Control

Business activities:

1. A manager evaluates progress one year into the project.

2. Employees submit suggestions for new investments.

3. The company builds a new factory.

4. Top management attends a retreat to set long-term goals.

5. Proposed investments are analyzed.

6. Proposed investments are ranked.

7. New equipment is purchased.

Calculate the present value of the following future cash flows, rounding all calculations to the nearest dollar.

11. \(5,000 received in three years with interest of 10%

12. \)5,000 received in each of the following three years with interest of 10%

13. Payments of \(2,000, \)3,000, and $4,000 received in years 1, 2, and 3, respectively, with interest of 7%

Question: Defining capital investment terms

Fill in each statement with the appropriate capital investment analysis method:

Payback, ARR, NPV, or IRR. Some statements may have more than one answer.

  1. _____ is (are) more appropriate for long-term investments.
  2. _____ highlights risky investments.
  3. _____ shows the effect of the investment on the company鈥檚 accrual-based income.
  4. _____ is the interest rate that makes the NPV of an investment equal to zero.
  5. _____ requires management to identify the discount rate when used.
  6. _____ provides management with information on how fast the cash invested will be recouped.
  7. _____ is the rate of return, using discounted cash flows, a company can expect to earn by investing in the asset.
  8. _____ does not consider the asset鈥檚 profitability.
  9. _____ uses accrual accounting rather than net cash inflows in its computation.
See all solutions

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