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Capital Allocation Decision at Innovate Corp.
A junior analyst at Innovate Corp. is tasked with recommending one of two mutually exclusive projects, both of which require the full expenditure of the company's $1.5 million investment budget. After reviewing the details, the analyst presents the following argument to their manager:
'Both Project Alpha (developing a new product) and Project Beta (acquiring a patent portfolio) require an immediate $1.5 million outlay. Because this initial cost is so high and is the same for both, it represents the biggest factor in our decision. The risk is identical. Therefore, we should not choose either project and instead look for a less expensive alternative.'
Evaluate the junior analyst's argument. Is their reasoning sound? Explain why or why not, based on the core principle for comparing investment alternatives that share a common initial expenditure.
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Capital Allocation Decision at Innovate Corp.