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Chapter 5

Asset investment decisions and capital

rationing

Outcome

By the end of this session you should be able to:

 evaluate the choice between leasing an asset and borrowing to buy using the
before-tax and after-tax costs of debt

 define and calculate an equivalent annual cost (EAC)

 evaluate asset replacement decisions using EACs

 explain the reasons why capital rationing might be required

 define and distinguish between divisible and indivisible projects

 calculate profitability indexes for divisible investment projects and use them to
evaluate investment decisions

 calculate the net present value (NPV) of combinations of non-divisible
investment projects and use the results to evaluate investment decisions

and answer questions relating to these areas.

The underpinning detail for this Chapter in your Integrated Workbook can
be found in Chapter 5 of your Study Text

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