What are the various tools for analyzing capital investments? What are the decision criteria, advantages and disadvantages of each? Which one would you recommend that your boss use in analyzing a new business opportunity? Why?
When a new business venture is adopted, an investment in working capital will be needed. Why is this the case? Your text notes that this investment in working capital is not depreciable and will be recaptured when the project ends. Is this a realistic assumption? What conditions might result in a case when this does not occur?
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Wal-Mart is frequently cited as one of the retailers who is most adept at managing its inventories and suppliers. Consider the following from Gosman & Kohlbeck regarding a study of the effect of a large retailer on supplier profitability:
“First, the adverse gross margin and any differential effect based on supplier size is eliminated for suppliers with Wal-Mart as a major customer. These results are consistent with Wal-Mart not extracting all benefits created in the supply chain through improved inter-firm relationships (similar to Kinney and Wempe’s [2002] results for JIT adopters). Second, the cash conversion cycle lengthens as supplier size increases, suggesting that Wal-Mart may provide terms that improve the cash conversion cycle to help support smaller suppliers. The lack of differential return on assets for Wal-Mart suppliers is consistent with these suppliers incurring other costs (e.g., increased expense sharing) in exchange for not reducing the gross margins. In contrast, it appears that non-Wal-Mart major customers focus on reducing their purchase prices, negatively affecting supplier gross margins.”
What are the underlying assumptions? Use the UOP Library to find a corroborating or conflicting perspective. What makes the example different? Do these parameters apply equally to small and large entities? Why or why not?
Gosman, M. L., & Kohlbeck, M. J. (2009). Effects of the Existence and Identity of Major Customers on Supplier Profitability: Is Wal-Mart Different? Journal of Management Accounting Research, 21(10492127), 179-201.
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