CHAPTER12. CAPITAL INVESTMENT DECISIONS
CHAPTER12: CAPITAL INVESTMENT DECISIONS
INTRODUCTION a Linear programming models a company has finite production capacity(machinery resource constraints If the demand suddenly increase, the company would be unable to meet this extra demand without increasing the amount of machine time that is available for production One way of meeting the additional product demand is for the company to buy a piece of machinery with greater production capacity. a Buying new equipment involves decisions making over future planning time periods
INTRODUCTION ◼ Linear programming models ❑ company has finite production capacity (machinery resource constraints) ❑ If the demand suddenly increase, the company would be unable to meet this extra demand without increasing the amount of machine time that is available for production ❑ One way of meeting the additional product demand is for the company to buy a piece of machinery with greater production capacity. ❑ Buying new equipment involves decisions making over future planning time periods
Break-Even model a Production capacity of the company is limited(250 units of output per production time period) a If the demand for the company' s product is greater than 250 units, then the company would be faced with the dilemma of how to handle this excess demand For a short -term increased demand Introducing overtime working Raising the price of the product a For a long-term increased demand Expanding the existing production facilities Building a bigger scale production plant a Company is faced with a decision which involves the costs and benefits that will accrue to the company over some future time horizon
◼ Break-Even model ❑ Production capacity of the company is limited (250 units of output per production time period). ❑ If the demand for the company's product is greater than 250 units, then the company would be faced with the dilemma of how to handle this excess demand. ❑ For a short-term increased demand ◼ Introducing overtime working ◼ Raising the price of the product ❑ For a long-term increased demand ◼ Expanding the existing production facilities ◼ Building a bigger scale production plant. ❑ Company is faced with a decision which involves the costs and benefits that will accrue to the company over some future time horizon
COMPOUNDING Notation for different time periods (yearly basis) a to -to stands for time period zero and represents right now; a t1 ---to stands for time period one and represents 1 year into the future a t2---to stands for time period two and represents 2 years into the future a tn---to stands for time period n and represents n years into the future where n can take on any value from 0.1.2
COMPOUNDING ◼ Notation for different time periods (yearly basis) ❑ t0 --- to stands for time period zero and represents right now; ❑ t1 ---to stands for time period one and represents 1 year into the future; ❑ t2 ---to stands for time period two and represents 2 years into the future; ❑ tn ---to stands for time period n and represents n years into the future , where n can take on any value from 0,1,2
Initial capital or lump sum o a financial investor has a sum of money to invest in time period to, for example f100 a If the investor deposits his f100 in an interest bearing bank account, how much will he have after 1 year a Suppose: the going rate of interest is 10%
◼ Initial capital or lump sum ❑ A financial investor has a sum of money to invest in time period t0, for example £100 ❑ If the investor deposits his £100 in an interest bearing bank account, how much will he have after 1 year. ❑ Suppose: the going rate of interest is 10%