CHAPTER 12 Capital investment 519giving a second look. Less than three years is a short period to allow for recovery of the initial invest-
ment and would be acceptable to many decision makers.
As you have seen in this chapter, these tools take little or no account of risk, with the exception that a
short PP reduces the period in which adverse factors can develop and manifest themselves. The tools that
are able to incorporate risk are the discounted cash flow methods — NPV and IRR.
The NPV of more than $62 000 would be acceptable to many managers, given the initial investment of
$120 000 and the fact that the investment is all in readily saleable assets with good second-hand values,
no matter what their ages. The discount factor of 10 per cent incorporates an assessment of inflation, risk
and alternative opportunities not taken up by undertaking this project. The IRR backs up the acceptable
outcome suggested by the NPV and, at 28 per cent, is quite high without being so high as to suggest that
the financial data might not be reliable.
In conclusion, all four tools suggest that the project is worth considering and, if not undertaken
immediately, then at least worth further investigation.
VALUE TO BUSINESS• Decision making is not as simple as crunching numbers and coming up with an answer. There are
a number of issues that can complicate decision making, such as problems with data collection,
the impact of taxation, opportunity costs, levels of risk, availability of finance, human resources, the
need to retain goodwill and future opportunities, and social responsibility.