Question

1. The chapter proves that scale does not affect the outcome of the NPV. Can you think of some real-life examples where the choice among different investments would be affected by their scale? If you were discussing investments with the non-business major, how would you explain scale and its impact?

2. Some benefits and costs cannot be quantified. What kinds of benefits and costs elude quantification, and how can these be factored into an investment decision?

3. How can one estimate cannibalization? Financial managers work closely with marketing and other departments in the development of project cash flows. Which department might be best equipped to answer this question?

4. React to the following statement, based on research by a reputable source: Debt in the capital structure makes managers more efficient because they are required to pay a fixed charge (interest). Managers of firms that have considerable excess funds tend to choose riskier projects because they have a “cushion” for their mistakes.

Answer 1

1. insufficient information dont know what chapter talks about

2. qualitative aspects cannot be quantified such as skills of the managment , name and fame of the company , quality of workforce etc

3.Finance and accounts department is best equiped from the effects of cannibalization suppose there is an introduction of a product within the same product line of the existing product which may reduce the sale of already estabilised product and have an impact of cannibilization .For eg introduction of new car by tesla within the same car segment

4. debt in the capital will not always improve the efficieny of manager it might put additional pressure on the managment which may result in sophisticated working condition , employee harrasment etc, but though it will help manager put effort because it has a charge to pay consistantly

excess funds doesnt mean risk involves it depends on the nature of the manager a risky manager might opt for the risky project to show excess return of course margin for error is increased whereas a reserve manager might choose for stable returns and grow capital through the time. risk involves is less and capital protection is also taken care of though high returns should not be factored in