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quantitative analysis

Yoshika Landscaping is contemplating purchasing a new ditch-digging machine that promises savings of $5,600 per year for 10 years. The machine costs $21,970, and no salvage value is expected. The company's cost of capital is 12%. You have been asked to advise Yoshika relative to this capital investment decision. As part of your analysis, compute:

1. The payback period.
2. The unadjusted rate of return.
3. The net present value.
4. The internal rate of return.

What factors besides your quantitative analysis should be considered in making this decision?

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Solution Preview

Besides the rate of return, what additional factors should a firm consider in its capital expenditure decisions?

The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.

Decisions like the change in the methods of sales distribution, or an advertisement campaign or research and development programs have long-term implications for the firm's expenditures and benefits, and therefore, they should also be evaluated as investment decisions. Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information ...

Solution Summary

In addition to rate of return, examine other factors of investment.