Accounting and Finance for Decision-Making

ACCOUNTING AND FINANCE
FOR DECISION-MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
WACC..........................................................................................................................................1
IRR...............................................................................................................................................1
General rule..................................................................................................................................2
Reasons for not accepting the projects whose IRR is higher than the COC................................2
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
The accounting and the financial information is used by the businesses to determine the
current position of the business and to verify the future investments that are required in the
business to maximize its earning capacity in the company. The capital budgeting decisions are
very crucial for the business and this is the reason that the proper analysis needs to be undertaken
to find out whether the investments are profitable for the company in the long run or not. The
current project shall be discussing over that even though a project might be having higher IRR as
compared to its cost of capital, yet there can be instances that such IRR is not in the favour of the
company and shall be diminishing the value and the argument to prove this statement.
MAIN BODY
WACC
The WACC of the business shall be determining the assumed rate of return of the
company through considering proportionately all the sources of capital by assigning the weights
to the individual sources like the equity, preference, long term borrowing, bonds, debentures,
retained earnings etc. In this process the COC of each source of the capital shall be multiplied by
the assigned weights and the product then shall be used to determine the value of WACC of the
firm (Raj, A. N., 2020). The formula to measure such WACC is:-
Weighted average cost of capital=(VE×Re)+(VD×Rd×(1−Tc))
where,
E = MV of the firm's equity
D = MV of the firm's debt
V = E + D
Re = Cost of equity shares
Rd = Cost of borrowings
Tc = Corporate tax
Internal Rate of Return
The IRR is an investment appraisal technique utilized in the process of investment
appraisal where the viability of the options are checked and the decision regarding their
acceptance is framed (Nukala, V. B. and Rao, S. P., 2021). The IRR measures the rate on which
there is no profit on the investment. This is the break-even point where the the ne proceeds are
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