Question

Project A will provide total revenue of $4 million Project B will provide total revenue of $2 million A young enthusiastic accountant has proclaimed that Project A therefore should be chosen for capital investment.

As a business finance student, explain using at least 3 factors the shortcomings of this conclusion.

Answer 1

Following are the shortcomings of this conclusion

The statement considers only revenue and investment in the project are not considered. There is possibility that plan A may provide lower net income or cash flow as compared to plan B.

The conclusion does not consider the time value of money which would provide another conclusion as revenue are not adjusted for risk.

The project selected based on the revenue could lead to loss for company and in long term may not provide expected return on investment which is also not considered before selecting the project.