Techniques of Project and Investment Appraisal in Financial Accounting

Running head: FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
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1FINANCIAL ACCOUNTING
Executive Summary:
This report aims at analysing and understanding various techniques of project and investment
appraisal. There are various management accounting techniques, which can be used in project
and investment appraisal. Some of them are NPV, IRR and Payback period. In this report, all
those techniques have been applied to evaluate their proposed investment in a newly developed
product line. The analysis helps in taking decisions related to the expansion of a new segment of
the business. Lastly, the report concludes with the interpretations of those financial tools which
have been used for the project appraisal technique.

2FINANCIAL ACCOUNTING
Table of Contents
Introduction:....................................................................................................................................3
Discounted Cash Flow Method of Assets Valuation:......................................................................3
Non-discounted Payback Period:.....................................................................................................4
Accounting Rate of Return:.............................................................................................................5
Net Present Value (NPV) and Internal Rate of Return (IRR):........................................................5
Sensitivity Analysis of NPV with respect to changes in price and quantity:..................................6
Feasibility of the Investment to the company:.................................................................................7
Positive NPV and Efficient Market hypothesis:..............................................................................9
Effect of Positive NPV in the Market value of the corporation:.....................................................9
Conclusion:....................................................................................................................................10
References and bibliography:........................................................................................................11

3FINANCIAL ACCOUNTING
Introduction:
Investment in fixed assets and in new manufacturing unit requires a huge amount of fund.
It also requires huge amount of sunk cost. Hence, before investing in such a long-term project,
the feasibility or the viability of the project must be checked. There are various project appraisal
techniques such as NPV, IRR, Payback period which are used for checking the feasibility of the
investment options. In this report, such a feasibility analysis has been performed in the following
parts using the said project appraisal techniques. The report also explains the process of project
appraisal techniques and interprets the outcomes of such analysis (Matthew 2017).
Discounted Cash Flow Method of Assets Valuation:
In case of assets valuation, the future cash generating capacity of the assets and the future
expected return from the asset is important. Valuations of assets and or project appraisal can be
best evaluated if it is calculated in terms of present value. That means all the future cash inflows
and outflows need to be computed in terms of present value by discounting the cash flows, by a
suitable discounting rate. Here, minimum required rate from the assets of the investment is
considered as the discounting rate. If all the cash flows can be converted into the present value
by discounting it with the required rate of return, the total present value of the investment can be
ascertained. This method of asset valuation or project appraisal is known as the Discounted Cash
Flow Model. It is widely accepted in various business and project evaluation. In the following
parts of this report some of such techniques have been applied for a better understanding of the
technique (Matthew 2017).