Question

The third step for making a capital investment decision is to establish baseline criteria for alternatives. Which of the following would; not; be an acceptable baseline criterion?

a) Payback period
b) Return on investment
c) Manager's personal preference
d) Net present value

Answer 1

The manager's personal preference is not an acceptable baseline criterion for making a capital investment decision because it is subjective. Instead, decisions should be based on quantifiable metrics such as (a) payback period, (b) return on investment, and (d) net present value, which provide an objective financial framework.

Step-by-step explanation:

The third step in making a capital investment decision involves establishing baseline criteria for comparing alternatives. The purpose of these criteria is to assess the economic merits of the investment options objectively. Acceptable baseline criteria typically include quantifiable and financially-oriented metrics such as the payback period, return on investment (ROI), and net present value (NPV). These measures provide a financial framework to compare the efficiency, profitability, and value of the investments over time, accounting for factors like cash flow and cost of capital.

However, the manager's personal preference does not constitute an acceptable baseline criterion because it is subjective and can be influenced by biases and personal interests that do not necessarily align with the company's financial objectives. As such, it's important for decisions to be based on objective financial criteria rather than personal opinions.