Chapter 11, Problem 1Q

To determine

Capital Investment decisions- Capital Investments decisions are crucial for the managers as the company might have several investment options available, but the funds are limited. Hence, the managers must very carefully analyze the potential of each investment before investing funds of the company, so that the returns on investments are maximized.

To explain:

The difference between screening and preference decisions.

Answer to Problem 1Q

Screening decisions are the initial decision taken by the managers to evaluate whether the given project is meeting the minimum investment criteria. Screening decisions are taken to initially filter out projects which do not fulfill the organization’s investment criteria.

Preference decisions are taken by managers when one than one investment proposal exist which have been initially screened in order to determine the project viability. In preference decision, the managers would select the most profitable project based on organizational proprieties amongst the given options

Explanation of Solution

The difference between the two can be understood with the following example.

• Say, initial screening decision would include whether the Accounting rate of return is more than the company’s hurdle rate, the NPV is greater than zero etc.
• However, preference decisions would include selecting the best alternative from the given alternatives i.e. if project A has greater profitability index than project B, project A will be preferred considering the risks and opportunities.