Chapter 12, Capital Investment Analysis
Review of Learning Objectives
capital investment analysis,
and describe its relation to the managementprocess.
Capital investment decisions focus on when and how much to spend on capital facilitiesand other long-term projects. Capital investment analysis, often referred to as
consists of identifying the need for a capital investment, analyzing courses of action to meet that need, preparing reports for management, choosing the best alternative,and dividing funds among competing resource needs.Capital investment analysis spans all phases of the management process. Whenmanagers plan, they analyze capital investment alternatives by screening and evaluatingthem before making funding decisions. They implement their capital investmentdecisions as they perform their duties during the year. In the evaluation phase, theyreview the results of their decisions. They prepare reports to communicate the results of their capital investment decisions as the reports are needed. Based on such reports, theymay decide to modify or curtail projects that are failing to meet expectations or to goforward with new projects.
LO2 State the purpose of the minimum rate of return, and identify the methodsused to arrive at that rate.
The minimum rate of return, or hurdle rate, is used as a screening mechanism to eliminatefrom further consideration capital investment requests with anticipated inadequatereturns. It saves executives’ time by quickly identifying substandard requests. The most
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