Capital Investment/ Relevant Costs

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1.A Select one of the capital investment evaluation methods described in Chapter 10 of your text. Fully explain the capital evaluation method’s strengths and weaknesses. Take a position and defend the use of your selected method. Be sure to use at least two scholarly sources to support your position. Your initial post should be (250 words)

1.B (Problem 10-41) Grosvenor Industries has designated $1.2 million for capital investment expenditures during the upcoming year. Its cost of capital is 14 percent. Any unused funds will earn the cost of capital rate. The following investment opportunities along with their required investment and estimated net present values have been identified:

Project Net Investment NPV Project Net Investment NPV
A $200,000 $22,000 F $250,000.00 $30,000.00
B $275,000 $21,000 G $100,000.00 $7,000.00
C $150,000 $6,000 H $200,000.00 $18,000.00
D $190,000 -$19,000 I $210,000.00 $4,000.00
E $500,000 $40,000 J $250,000.00 $35,000.00

In your response, complete the following:

  • Rank the projects using the profitability index. Considering the limit on funds available, which projects should be accepted?
  • Using the NPV, which projects should be accepted, considering the limit on funds available?
  • If the available investment funds are reduced to only $1,000,000:
    • Does the list of accepted projects change from Part 2?
    • What is the opportunity cost of the eliminated $200,000?

    2. A Two partners own together a small landscaping business in North Carolina, called Summer Lawn Care. They have been specializing in summer grass seeding, installation, and maintenance. Recently, the partners acquired special technology and know-how for winter grass installations and maintenance. They also added a tree cutting service as recent storms in the area had caused demand for this service to soar. One of the partners insists that the name of the business should change to Lawn and Tree Care, so that it better reflects the range of services and, thus, generates more customer interest, and thus contracts. The second partner wants to keep the old name and argues, “We have already paid for business cards, vehicle paint, signage, and ads in Yellow Pages”. Evaluate the arguments of the two partners. Explain and illustrate their points by identifying the relevant and irrelevant costs for this decision. (300 Words)

  • 2B Explain what is meant by “contribution analysis”. Carefully define the term and provide examples to illustrate it.

    Guided Response: Can you think of a recent example where you had to evaluate the incremental costs and benefits of different options in order to make a decision? In (300 words or more), please, provide your response to the above discussion question. Respond substantively to at least two of your classmates’ postings. Substantive responses use theory, research, and experience or examples to support ideas and further the class knowledge on the discussion topic.

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