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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Qualitative issues in investment analysis

 The following are 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 competition, and serve the customer.... We’ll make any investment that will pay bock quickly… but if it is something that we really see as a must down the road, payback is not going to be that important.”

Chairman of Amgen Inc. (a biotech company). “You cannot really run the numbers, do net present value calculations, 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 assumptions]. Success in a business like this is much more dependent on tracking rather than on predicting, much more dependent on seeing results over time, tracking and adjusting and readjusting, much more dynamic much more flexible.”

Chief financial officer of Merck & Co., Inc.(a pharmaceutical company):”... at the individual 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 our.”

 Explain the role of capital investment analysis for these companies.

To determine

Qualitative Issues in Investment Analysis

Case Summary

CEO of W Industries (high technology steel company) said that, they try to find the best technology, stay ahead of the competition, and serve the customer. They will make any investment that will pay back quickly, if they see anything must down the road then payback is not much important for them.

Chairman of A corporations (Biotech Company) said that, one just cannot run the numbers without calculation of net present value, because the uncertainties are really gigantic. A business has to decide on a project and then does the reality check on the assumptions. Success in business is more dependent on tracking and adjusting and re-adjusting, and seeing results over time rather than just predicting.

CFO of M Corporations (Pharmaceutical Company) said that the development of a successful new product requires spending more on R&D, rather than focusing only on discounted cash flow analysis.

To explain: The role of capital investment analysis for three companies.

Explanation

In case of W Industries, a high technology steel company, they focus more on technology, competition prevailing in the market and customer satisfaction. It’s not true they don’t consider the payback of investment; but if they find any good opportunity they can ignore payback of investment...

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