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The Fundamental Question of Investment Appraisal
A company is considering a project that costs $100,000 today and is expected to yield a return of $105,000 in one year. Beyond simply determining if the return is greater than the cost, what is the fundamental question the company must answer to decide if this is a worthwhile investment? Explain your reasoning.
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A project manager is presented with a proposal for a new equipment upgrade. The upgrade costs $500,000 today and is projected to generate a one-time return of $520,000 in exactly one year. The manager approves the project, stating, 'The decision is simple. Since the $520,000 we get back is more than the $500,000 we spend, it is a profitable venture and should be accepted.' Which statement provides the most accurate critique of the manager's reasoning?
Investment Decision for a Small Business
The Fundamental Question of Investment Appraisal
A company should always approve an investment project if the total expected monetary return in the future is greater than the initial monetary cost, because this condition alone ensures the project is the most profitable use of the company's funds.
Evaluating Competing Investment Opportunities
Match each investment scenario with the core principle of investment appraisal it best illustrates.
A firm is considering a project that requires an initial investment of $100,000. The project is expected to yield a single payment of $108,000 in exactly one year. The firm has an alternative, equally risky option of investing the $100,000 in a financial asset that provides a 5% annual return. Based on this information, what is the most logical decision and justification?
A financial analyst is evaluating a proposed project. The project requires an initial outlay of $1,000,000 and is projected to yield a single, certain return of $1,050,000 in exactly one year. Based on this information alone, the analyst cannot yet recommend whether to accept or reject the project. What single piece of information is most essential for the analyst to make a sound recommendation?
Formulating the Investment Decision
A manufacturing firm is considering a project to upgrade its factory machinery. The project requires an immediate expenditure of $500,000 and is projected to yield a single, certain return of $530,000 in one year. To decide whether this 6% return is 'sufficiently high,' what is the most critical benchmark the firm should compare it against?