Application of Investment Appraisal Techniques
Added on 2021-06-17
17 Pages4660 Words38 Views
Finance
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Accounting and finance
TABLE OF CONTENTSIntroduction................................................................................................................................3Investment appraisal techniques................................................................................................3Accounting rate of return.......................................................................................................3Payback Period.......................................................................................................................4Net present value....................................................................................................................6Internal Rate of Return...........................................................................................................7Investment scenario..................................................................................................................10Application of investment appraisal techniques and conclusions............................................11Calculations..........................................................................................................................11Statement showing annual cash flow...............................................................................11Accounting rate of return.................................................................................................11Payback period.................................................................................................................11Net present value..............................................................................................................12Internal rate of return.......................................................................................................12Decision................................................................................................................................13Assumptions.........................................................................................................................13Ethical considerations..............................................................................................................14Conclusion................................................................................................................................15References................................................................................................................................16
INTRODUCTIONIt is identified that the investment decision is based on the decision rule that is implementedunder different circumstances. Hence, the decision rule itself incorporated following listedinputs 1)Cash Flow2)Project Life 3)Discounting Factor It is noted that the effectiveness of the decision emphasized on the proper assessment of allthree factors which requires being done in an effective manner. It is analyzed that cash flowestimation needs an immense project understanding time before its implementation;specifically the economy macro and micro view, the company, and polity. The life of theproject is essential to focus; because the entire prospect of the project will be affected orchange(Abor, 2017). Thus, a proper determination is needed to focus on having project lifeestimation. It is noted that cost of capital is known as the discounting factor which hasdetermined a change over the years. It is due to the fact that capital cost has differentconnotations in the perspective of different philosophies of the economy. Such as; India hasdetermined a change in the circumstance of Indian economic ideology to open economy fromthe closed economy. Thus, it can be stated that capital cost carries out its high influence onthe evaluation of investment. The present study is based on the description of crucial investment appraisal techniques byconsidering its merits and demerits. Further, the hypothetical scenario will be created andinvestment appraisal techniques will be applied to determine whether the investment is viableor not. In the last part of study importance of ethical consideration will be analyzed infinancial decision proposed in the project. INVESTMENT APPRAISAL TECHNIQUESAccounting rate of return
The accounting rate of return is also elaborated as ROI (Return on Investment), it is a returnon capital employed consider as ROCE, and it used to follow accounting information insteadof cash flow. Meaning; It is noted that term ARR is the average ratio focus after-tax profit and divided bygiven average investment. Computing Method; there has been a number of the method used to compute the ARR. Thus the most used andcommon method of computing ARR is done by the given formula;ARR= Average Annual Profit After Tax/ Average Investment*100 Moreover, average after-tax profit is evaluated by adding Profit after Tax and divides thetotal by each year numbers.Decision Rule; The ARR is also used for the decision criterion in order to select the proposalof investment (Bierman and Smidt, 2014). The diction rued defines information that if thedetermined ARR is not less than the minimum rates set by the high official tends to acceptthe project and ARR is not higher than the minimum rates set by the high official tends toreject the project (Wei, 2018). Merits:It is a simple and easy method to compute the value It is based on the accounting information which is familiar with ventures and information iseasily available Demerits:It is not based on the cash flow for project evaluation It does not consider the valuation of monetary time value. Due to this, the benefits cannot bevalued at the part in early and later years. It is focusing on profit averaging; however, it is taking into account all years Payback Period
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