Question

Asked Apr 1, 2019

An investment with total costs of $10,000 will generate total revenues of $11,000 for one year. Management thinks that since the investment is profitable, it should be made. Do you agree? What additional infromation would you want? If funds cost 12 percent, what would be your advice to management? Would your answer be different if the cost of capital is 8 percent?

Step 1

An investment with total costs of $10,000 will generate total revenues of $11,000 for one year. Management thinks that since the investment is profitable, it should be made.

We will diagree with the management view. Decisions based on profitability, ignores the concept of time valu...

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