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The board of OKN is considering an investment opportunity that will require the company to borrow a large amount in month 10 of the current financial year and to invest it immediately in property, plant and equipment. This investment has a positive net present value that justifies the risk, but the directors are reluctant to invest in the project.
Why might the directors be reluctant?
Suggested Answer: A
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12 comments · newest first
MA
Marti
3 months ago
But what about option D? Future profits might be at risk if they borrow too much now.
VI
Vicente
3 months ago
I agree, Jenna. Option C makes sense too. Immediate investment can hurt this year's profit.
LE
Lezlie
3 months ago
I think the directors are worried about option A. Reduced returns can look bad.
RE
Rebbecca
3 months ago
I think future profits could be impacted too, not just this year.
GI
Giuseppe
3 months ago
A reduction in return on capital employed is definitely a concern.
HE
Henriette
4 months ago
Wait, how can a positive NPV still make them hesitant?
CA
Carline
5 months ago
Totally agree, big investments can hurt short-term profits.
MY
Myra
5 months ago
They might be worried about cash flow issues.
FR
Frederic
6 months ago
I vaguely remember that a significant investment could lead to a temporary dip in profits, so maybe option C is the right choice after all.
HO
Hollis
6 months ago
I feel like the directors might be worried about future profits being affected, which could relate to option D, but I can't recall the details.
GE
Gertude
6 months ago
I think we practiced a similar question where the immediate costs affected the year's profit, so option C might be relevant here.
EA
Earleen
6 months ago
I remember discussing how a large investment can impact return on capital employed, but I'm not sure if it would reduce or increase it in this case.