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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Qualitative issues in investment analysis

The following an some selected quotes from senior executives
CEO, Worthington Industries (a high technology steel company): We try to find the best technology, stay ahead of the corn petition, and serve the customer.... We’ll make any investment that will pay back quickly... but ¡fit is something that we really see as a must down the road, payback is not going to be that important. Chairman of Arnjen Inc. (a biotech company): “You cannot really run the numbers, do net present value cakulations, because the uncertainties are really gigantic.... You decide on a project you want to run, and then you run the numbers ¡as a reality check on your assump tionsi. Success in a business like this is much more dependent on tracking rather than on predicting, much more dependent on seeing resufts over time, tracking and adjusting and read justing, much more dynamic much more flexible. Chief Financial Officer of Mcr c 4 & Co., Inc. (a pharmaceutical company): . . . at the indi vidual product level—the development of a successful new product requires on the order of $230 million in R&D, spread over more than a decade—discounted cash flow style analysis does not become a factor until development is near the point of manufacturing scale-up effort. Prior to that point, given the uncertainties associated with new product development, it would be lunacy in our business to decide that we know exactly what’s going to happen to a product once it gets out.”
ExpLain the role of capital investment analysis for these companies.

To determine

Concept introduction:

Capital Investment:

The investment made for expanding business or in any project or purchasing capital assets for the business.

The role of capital investment analysis.

Explanation

The companies are not focusing on the investment that will be made in the project but are more focused on the technology to be used, research and development, success of the product. They are not applying the techniques for determining the capital inv...

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