Activity: Deciding to Invest in Increased Capacity Based on Profit Potential
A firm, after analyzing the potential for increased profits, makes the decision to proceed with an investment. In this case, the judgment that future profits justify the cost leads to the choice of expanding daily production capacity to 200 loaves.
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.8 Supply and demand: Markets with many buyers and sellers - The Economy 2.0 Microeconomics @ CORE Econ
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Bakery Expansion Decision
A small coffee shop is considering purchasing a new, larger espresso machine for $5,000. The owner estimates this new machine will allow them to serve an additional 40 customers per day, with each additional customer generating $2 in profit. The machine is expected to have a useful life of five years. Which of the following statements provides the most robust economic justification for whether to proceed with this investment?
Investment Decision Factors
A manufacturing firm determines that investing in a new production line will increase its total annual revenue. Based on this information alone, the firm should proceed with the investment.
A company is considering a significant investment in new machinery to increase its production capacity. Arrange the following actions into the correct logical sequence that the company should follow to make a sound investment decision based on profit potential.
Evaluating a Capacity Expansion Project
A firm is considering several investment options to increase its production capacity. Match each scenario with the most logical investment decision based on a simple profit potential analysis.
A company decides to invest $200,000 in new machinery to expand its production capacity. The primary justification for this expenditure is the expectation that the resulting increase in production will generate future profits that not only recover the initial $200,000 but also yield an acceptable ____.
A bicycle manufacturer is currently producing at its maximum capacity of 1,000 bikes per month and selling them all. Market research indicates they could sell 1,200 bikes per month if they could produce them. They are considering a factory expansion that costs $500,000. The company's accountant projects that the additional 200 bikes per month would increase annual revenue by $120,000. Based solely on this revenue projection, the CEO decides to approve the expansion. Which of the following statements best evaluates the CEO's decision-making process?
A company has $50,000 available to invest. It identifies a project to purchase new equipment that is projected to increase its total profits by $60,000 over the next three years. The company's management concludes that because the projected profit is greater than the initial cost, the investment is a sound decision and should be approved. Why might this conclusion be flawed?