Chapter 16, Problem 4ATC

ATC 10-4 Writing Assignment Limitations of capital investment techniques

Webb Publishing Company is evaluating two investment opportunities. One is to purchase an Internet company with the capacity to open new marketing channels through which Webb can sell its books. This opportunity offers a high potential for growth but involves significant risk. Indeed, losses are projected for the first three years of operation. The second opportunity is to purchase a printing company that would enable Webb to better control costs by printing its own books. The potential savings are clearly predictable but would make a significant change in the company’s long-term profitability.

Required

Write a response discussing the usefulness of capital investment techniques (net present value, internal rate of return, payback, and unadjusted rate of return) in making a choice between these two alternative investment opportunities. Your response should discuss the strengths and weaknesses of capital budgeting techniques in general. Furthermore, it should include a comparison between techniques based on the time value of money versus those that are not.