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Incorporating the Cost of Capital - Research Proposal Example

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Incorporating the Cost of Capital

On the other hand, A negative net present value is a bad management decision. Thus, management must not push through with the planned investment. The Net present value is arrived at by the following:
The managers will invest in a capital asset only if the net cash inflows are more than cost of capital. The difference between the two is the net cash inflow. The entire articles gives evidences that this very popular formula is more than just a formula. The entire journal is devoted to giving importance to the factors of sales, variable expenses and costs, as well as fixed expenses an costs. Clearly, the objective of the paper is persuade managers of the importance of cost of capital in decision making activities.
The objectives are correctly stated. The objective truly draws the reader to the reasons of managers in using the various components in the cost volume profit analysis. For, the article clearly explains how the sales, variable expenses and costs as well as fixed expenses contributed to the increase and decrease of net income. The article clearly shows that cost of capital is a very important tool in determining if it would be economically profitable to infuse more money into a high monetary value assets (Schneider,1). Obviously, the objectives are correctly stated.
One of the key issues considered in the article shows that cost of capital is arrived at by by including the interest expense spend fo...
the net present value in determining if it is profitable to invest large sums of money in a new equipment or other similar large funded investments. The articles states that Cost Volume Profit Analysis incorporates the cost of capital. Evidently, one of the key issues considered in the article shows that cost of capital is arrived at by by including the interest expense spend for borrowing money.

Further, this same article also explains that there is a strong relationship between cost of capital and factors like net revenues, variable expenses and fixed expenses. In addition, the articles tells that managers would make better decisions if the cost of capital is included in the cost volume profit analysis. The article also tells that the manager's process improvement decisions must also include financial data under product mix and pricing. This formula is the mathematical representation of the economics of producing a product. The article shows that the investment is not good if the cost of capital is more than the net cash inflow from operating the investment. On the other hand, an investment in high value items is an excellent management decision if the net cash inflow exceeds the cost of the capital. The article also discusses that increases in variable costs will decrease profits. On the other hand, increases in net revenues increases profits. Further mathematical computations show that net profit is the difference between the net revenues and total expenses and costs. Truly, this same article also explains that there is a strong relationship between cost of capital and factors like net revenues, variable expenses and fixed ...Show more

Summary

The objective of the paper is persuade managers of the importance of including cost of capital in their decision making activities. The cost of capital is arrived at by by including the interest paid for borrowing money. The inclusion of the interest paid for money borrowed is called present value…
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Incorporating the Cost of Capital essay example
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