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The Flaw in a Simple Profit Calculation
A business owner is evaluating a one-year project that costs $100,000 today and is guaranteed to generate a revenue of $102,000 in one year. The owner concludes, 'Since the revenue of $102,000 is greater than the cost of $100,000, this project is profitable and we should proceed.' Analyze the business owner's reasoning. Explain why this simple comparison is an insufficient basis for making a sound investment decision, and identify the crucial element missing from their evaluation.
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Benchmark for Investment Decisions: Financial Markets
Bakery's Investment Dilemma
A manufacturing firm is considering a project to upgrade its machinery. The upgrade costs $500,000 today and is guaranteed to generate an additional $520,000 in revenue exactly one year from now. In order to make a sound decision about whether to proceed, which of the following pieces of information is most essential for the firm's managers to consider?
A company should always proceed with a one-year investment project if the expected future revenue from the project is greater than its initial cost.
Evaluating a Simple Investment
The Flaw in a Simple Profit Calculation