CHAPTER 12 Capital investment 527Decision-making activities
12.35 Esther and Joan own and manage Cart and Carry, a roadside café located on a main highway on the
way to the snow fields in the Victorian Alps. Cart and Carry services the tourist traffic each year and
in addition, it supplies to the local community small car parts. As the cost of purchasing stock has
risen year after year and stockholding costs have also risen, Esther has posed the question whether
such large stocks are worth keeping. Joan argues that they have a reputation for ‘nearly always having
the part needed’. She says this is a reputation worth having. Esther counters that with the argument
that they are often left with stock that they have specially ordered after customers ‘forget’ to return.
Sometimes the orders are for special parts that are not generally in demand.Required
a. What are the investment issues here? Explain in terms of risk, opportunity costs and finance.
b. How do you suggest they could solve the ‘forgotten’ orders problem?
c. Is your solution likely to impact on the entity’s goodwill?12.36 Robbie Turner is a geologist working for a mining company. Robbie spends a great deal of
her time on field trips studying rocks and ground-truthing maps, which have been developed
from aerial and satellite surveys. Because Robbie has spent so much time in the field, she has
developed her skills as an amateur field naturalist. She is well aware of the definition of ‘amateur’,
as a person who loves what she is doing. One day she makes two exciting discoveries — on a
rocky hill she finds a colony of jewel moths long thought extinct and also strong indications of a
payable gold deposit. If the gold is mined, there is a strong possibility the land disturbance will
upset the feeding and breeding of the moths.
Required
a. Should Robbie report all she has found that day? What are the issues for her?
b. If Robbie reports both finds, and further exploration suggests the mining venture would be
profitable, should the entity go ahead with the mine? Assume the entity has a number of
gold prospects to explore. What is your view? Explain with reference to the investment and
environmental issues.12.37 Consider the reality check ‘IBM and HP are looking at diversification, but where should you invest?’.
Required
a. Discuss the risks and the potential benefits for IBM and HP in boosting investment in cyber
security and cloud computing.
b. What are the potential issues for these companies if they decide to forgo this investment?References
BMW Group 2014, Annual report 2014, http://www.bmwgroup.com.
‘IBM and HP are looking at diversification, but where should you invest?’ 2014, GuroFocus, 28 April, http://www.gurufocus.com/
news/256982/ibm-and-hp-are-looking-at-diversification-but-where-should-you-invest.
JB Hi-Fi Ltd 2015, Preliminary annual report 2015, http://www.jbhifi.com.au.
Qantas Group 2015, Annual report 2015, http://www.qantas.com.au.
Quinn, K 2013, ‘Film studio creates more lights, camera, action’, Sydney Morning Herald, 25 February, http://www.smh.com.au/
entertainment/movies/film-studio-attracts-more-lights-camera-action-20130224-2eznm.html.
Acknowledgements
Reality check: IBM and HP are looking at diversification, but where should you invest?: © GuruFocus.
Photo: © mirzavisoko / Shutterstock.com.
Photo: © Maksim Koval / Getty Images.
Photo: © michaeljung / Shutterstock.com.