Accounting and Finance for Managers

Running head: ACCOUNTING AND FINANCE FOR MANAGERS
Accounting and finance for managers
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1ACCOUNTING AND FINANCE FOR MANAGERS
Table of Contents
Introduction................................................................................................................................2
(a) Payback period................................................................................................................2
(b) Accounting rate of return................................................................................................4
(c) Net present value.............................................................................................................6
(d) Internal rate of return......................................................................................................8
(e) Conclusive comments on viability of the projects..........................................................9
Reference..................................................................................................................................10
Appendix..................................................................................................................................12

2ACCOUNTING AND FINANCE FOR MANAGERS
Introduction
Goodflow Plc is the house building entity that is planning to build 200 houses on
development site during the next 4 years. 2 types of houses will be build that is small houses
and large houses. Cost for the houses will involve the variable construction cost and fixed
variable cost that will be expensed for construction of utilities, garden drainage and new
roads. The main purpose of the report is to evaluate the viability of the project through
various techniques of investment appraisal. Various techniques those will be used are
payback period, accounting rate of return, net present value and internal rate of return. The
report will further focus on merits and demerits of each technique those will be used for
measuring the project’s viability. Finally, based on the analysis comments will be provided
regarding the viability of the project (Yuniningsih, Widodo and Wajdi 2017).
(a) Payback period
Payback period is used for determining the time period that will be required for
recovering the project’s initial cash outflow. In other words, it is the method used for
computing the required time for earning back the amount incurred in investment through
consecutive cash inflows. It is calculated as follows –
Payback period = Initial investment / cash flow per period
Generally, the project is accepted only if the payback period is lower as compared to
the targeted payback period of the entity. Managers often have issues while they are required
to select on project among 2 or more than that. Taking such decision is crucial as the
resources are always limited. Hence, they are required to select the project that will maximize
the return. Various merits and demerits are associated with the payback period as discussed
below for critically analysing the technique (Arrow 2017).

3ACCOUNTING AND FINANCE FOR MANAGERS
Merits of payback period are as follows –
 Easy to understand and simple to use – this is the most noteworthy advantage of this
technique. This approach requires comparatively few inputs and is easier to compute
as compared to other methods of capital budgeting. Only requirement is the initial
cost of the project and the annual cash flows. Though other methods are also simple
they require comparatively large numbers of assumptions (Moodley, Muller and
Ward 2016).
 Preference for the liquidity – it is crucial information that is not revealed by any other
methods. Generally the project with the shorter payback period is also exposed to
lower level of risk. This information is significantly crucial for small businesses with
the limited resources as small businesses require quick recovery of the cost so that the
amount can be reinvested in other opportunities.
 Quick solution – as payback period is simple to compute and it requires fewer
assumptions, business managers are able to quickly compute the project’s payback
period. it assists them in making quick decisions which is important for the entities
with the limited resources.
 Useful where uncertainty involved – it is useful for the industries with uncertainty or
that experiences rapid changes in technologies. Such kind of uncertainties makes it
tough for estimating the future cash inflows. Hence, undertaking the projects with the
shorter payback period assists to reduce the likelihood of loss through the
obsolescence (Gotze, Northcott and Schuster 2016).
Demerits and limitations of payback period are as follows –
 Time value of money is ignored – this is the major disadvantage of payback period
that it does not consider the time value of money that is an important aspect of