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Capital Investment Evaluation

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.

(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:

Ranking Investment Alternatives

Project Net Investment NPV Project Net Investment NPV

A $200,000 $22,000 F $250,000 $30,000

B 275,000 21,000 G 100,000 7,000

C 150,000 6,000 H 200,000 18,000

D 190,000 (19,000) I 210,000 4,000

E 500,000 40,000 J 250,000 35,000

In your response, complete the following:

1. Rank the projects using the profitability index. Considering the limit on funds available, which projects should be accepted?

2. Using the NPV, which projects should be accepted, considering the limit on funds available?

3. If the available investment funds are reduced to only $1,000,000:

(a) Does the list of accepted projects change from Part 2?
(b) What is the opportunity cost of the eliminated $200,000

Solution Preview

I choose the net present value method as my capital investment evaluation method. This capital investment evaluation method is actually my favorite. It is very straightforward to use making it the "most frequently used method for making financial decisions" (Sun & Queyranne, 2002, n.p.). This straightforwardness is NPV's main strength. The decision made using complicated evaluation techniques that require advance mathematical skills to ...

Solution Summary

This solution explains the net present value method and answers various investment related questions in Excel.