Accounting Tools and Measures

This document discusses investment decisions and the accounting tools and measures used for investment appraisal. It explains net present value, internal rate of return, accounting rate of return, and payback period. It also explores investment analysis and the different centers within an organization using Amazon as an example.

Running head: ACCOUNTING TOOLS AND MEASURES
Accounting Tools and Measures
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ACCOUNTING TOOLS AND MEASURES
Contents
Part II:..............................................................................................................................................2
Part III:.............................................................................................................................................3
References:......................................................................................................................................5

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ACCOUNTING TOOLS AND MEASURES
Part II:
Investment decisions:
Investment decisions are very crucial to an organization and its survival. The ability of an
organization to make investment in profitable investment opportunities helps an organization to
continue its business operations in the long run. Number of tools and techniques are available to
appraise investment opportunities to take correct investment decisions. These tools and
techniques are referred to as capital budgeting techniques. Such techniques include net present
value analysis (NPV), internal rate of return method (IRR), payback period method and
accounting rate of return method (ARR).
Net present value:
Using cost of capital as the rate of discount the expected cash inflows over the useful life of a
project or investment are discounted to deduct from the initial cost of investment. The resultant
difference is the NPV of the project or investment. If the present value of total cash inflows is
higher than the cost of investment then it is a desirable investment opportunity otherwise not
(Nuno Moutinho & Helena Mouta, 2018).
IRR:
Internal rate of return is calculated to determine whether it is higher than cost of capital or not. In
case IRR for a project or investment opportunity is higher than cost of capital then only
investment shall be made on such project.
Accounting rate of return:

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ACCOUNTING TOOLS AND MEASURES
Accounting rate of return is calculated by dividing the net profit from average investment. This is
a simple rate of return used to assess the desirability of an investment proposal (Mclean, 2009).
Payback period:
Payback period is calculated to determine the expected amount of time needed to recover the
initial capital invested in a project.
Investment analysis:
The net present value of investment A is $25,815.74 and that of B is $62,284 thus, from simple
NPV point of view, investment option B is more attractive thus, most likely to be selected for the
purpose of investment. The accounting rate of return of investment option B is also higher at
45% as compared to 32% of investment option A. Thus, the company should invest in option B.
Though the payback period and IRR of investment B are lower than investment A still, the
company should invest in option B as in such situation generally the NPV is considered for
selection of investment purpose (Efni, 2017).
Part III:
Amazon has been chosen to explain different centres within the organization. Generally there are
three centres within an organization, these are cost, profit and investment centres. Amazon has
its operations spread to different parts of the globe. In fact Amazon is probably the only
company in the world which fulfils its orders by delivering the ordered products to its customers
within three to five days from placement of orders irrespective of the locations of the person
placing the order.
The cost centre of the company is continuously growing as its operations are also growing with
continuous addition to new geographical and product segments. The company packages items

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ACCOUNTING TOOLS AND MEASURES
from different distributors to supply these packages to the customers. The packaging cost apart
from the cost of product is one of the most significant cost incurred in the cost centre of the
company. Keeping the cost of products and packaging under or within the budget is the main
objective of cost centre of the company (Danazimi Jibril, Toyin J & ., 2018).
Profit centre of the company is responsible to generate revenue by incurring costs. The objective
of profit centre is to maximize the ability of the company to earn revenue from business
operations. Amazon over the years has increased its revenue and profit from business operations
significantly. This is mainly due to the ability of the company to expand its operations to
different parts of the globe.
The investment centre on the other hand looks for better investment proposals to invest and
maximize the amount of return for an organization. Amazon has a very efficient investment
centre in place that has helped the company over the years to make proper investment. In 2016
the company invested in wind and solar firm to generate electricity for 90000 homes in US
(BROWN, 2009).

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References:
BROWN, H. (2009). THE PRESENT THEORY OF INVESTMENT APPRAISAL: A
CRITICAL ANALYSIS*. Bulletin Of The Oxford University Institute Of Economics &
Statistics, 31(2), 105-131. doi: 10.1111/j.1468-0084.1969.mp31002004.x
Danazimi Jibril, J., Toyin J, Z., & ., .. (2018). Title Risk Identification Techniques in Valuation
and Investment Appraisal. International Journal Of Engineering & Technology, 7(3.30), 70.
doi: 10.14419/ijet.v7i3.30.18158
Efni, Y. (2017). The mediating effect of investment decisions and financing decisions on the
effect of corporate risk and dividend policy against corporate value. Investment
Management And Financial Innovations, 14(2), 27-37. doi: 10.21511/imfi.14(2).2017.03
Mclean, S. (2009). Property investment appraisal. Journal Of Building Appraisal, 4(4), 331-331.
doi: 10.1057/jba.2009.7
Nuno Moutinho, & Helena Mouta. (2018). The Importance of Strategic Analysis in Investment
Appraisal. China-USA Business Review, 17(10), 12-24. doi: 10.17265/1537-
1514/2018.10.002