After Completing This Chapter...
The student should be able to:
· Identify capital expenditure project proposals of several types, including mutually.
Mutually Exclusive Alternatives and Single Project Proposals
·Identify and reject unattractive alternatives, and select the best alternative from each
project proposal.
·Use the rate of return and present worth methods to ration capital among projects.
·Rank project proposals by MARR.
QUESTIONS TO CONSIDER :;.
- Cancelling projects, particularly ones in which large investments have already been
made, is a difficult process in any business. At the Wne that Donald Rumsfeld was
preparing to cancel the Crusader project, he would also have had to consider the case
against cancellation. Some pressures to keep the project would have come, for example,
from Congressional representatives from districts where the Crusader would be built, or
who saw merit in the original Army argumentsin favorof the system, or from some Army
representanves. What factors would a decision-makerlike Rumsfeld have to consider to
decide among competing interests?
- In the past, the militaryhas generally sought to order large quantities of specificweapons
in order to keep the unit cost down. In the more uncertain military future, the Pentagon
may have to order smaller quantities, but within a wider range of components, in order
to keep up with swiftly changing battlefield conditions. How could this affect defense
department budgeting decisions?
- From the point of view of a purchasing firm (in this case, the US Government),you would
need to consider your firm's budgets, needs, and political pressures within the firm when
allocating capital. What other concerns do you need to allow for when rationing capital?
- From the point of view of an engineering firm (in this case, Crusader's manufacturer),
you would need to consider the long-term prospects of your customer contracts. How
would you prepare your firm to recover from the cancellation of an important contract?
What effect would this have on your capital allocation decisions?
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