BCA Business Case Analysis: Second Edition by Brannock James

BCA Business Case Analysis: Second Edition by Brannock James

Author:Brannock, James [Brannock, James]
Language: eng
Format: epub
Publisher: STS Publications
Published: 2012-05-10T16:00:00+00:00

Gradual Improvement in Capital Stock

So far, the analysis has only considered recouping lost efficiencies due to PC downtime and then maintaining current capabilities. It pays to invest toward this goal, since the net savings on internal investments is 25% (i.e., $7.06 ÷ $28.68) are considerably higher than the expected 4.1% rate of earnings savings could achieve using market investment rates.

In fact, since the internal rate is higher, management might consider investing more of the savings into the capital—to enhance ‘normal’ productivity. For example, the current reinvestment rate of savings is 58% (i.e., $9.56 ÷ $16.62). Suppose management decided to increase this investment up to 65%. Exhibit 8-7 shows a table of expected enhanced of savings under this scenario, discounted at 4.1%.

Exhibit 8-7


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