(MA) Management Accounting Assignment

Running Head: Management Accounting
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Project Head: Management Accounting

Management Accounting
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Contents
Introduction.......................................................................................................................3
NPV and IRR....................................................................................................................3
Literature review...............................................................................................................4
Objective of the study.......................................................................................................8
Methodology.....................................................................................................................8
Primary sources............................................................................................................8
Secondary sources........................................................................................................8
Findings............................................................................................................................8
Recommendations and Conclusion...................................................................................8
References.......................................................................................................................10

Management Accounting
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Introduction:
Every organization faces dilemma condition in choosing 1 project from more than 2
projects. Companies choose the best project according to their needs and the requirements.
These projects help the company to manage the operations and the process of the comapny.
Projects must be chosen by the company after analyzing and evaluating the various
requirements, demands and the problems in the process and the functions (Wright, Daugaard,
Satrio and Brown, 2010). Basically, various techniques are available which could help a
comapny to analyze and evaluate the best proposal on the basis of their needs and the
requirements.
Net present values and internal rate of return is also one of the techniques which help
a comapny to choose among 2 or more projects, the bets project. Both of this technique
considers the different criteria to choose the best projects.
NPV and IRR:
NPV stands for net present value. This technique depict that it is required for every
business t identify the total profit according to the today’s worth of the invested amount. In
this process, the cash inflow, cash outflow and the present value factors are considered to
analyze the total profit which could be earned by the company if the investment is done in a
particular project. This technique expresses that the profit making is the main aim of every
business and every business is required to focus over it. Formula of NPV is as follows:
Net present value = present value of cash inflow – present value of cash outflow (Deegan,
2013)
IRR stands for internal rate of return. This technique depict that it is required for
every business to identify the total return through the investment. In this process, the cash
inflow, cash outflow, present value factors and cumulative frequencies are considered to
analyze the total return which could be earned by the company if the investment is done in a
particular project. This technique expresses that the analysis of return is requisite to identify
the position of the proposal. Formula of IRR is as follows:
IRR = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n
Where,
P0, P1.....Pn equals to the cash flow

Management Accounting
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IRR = internal rate of return (Du and Girma, 2009)
Literature review:
Garrison et al (2010) has depicted in his study that NPV is the total difference among
the invested amount and the present value of all the cash inflows in the life of investment.
Further, it has been reviewed that this method calculates and analyze the entire expected cash
flows whether it is inflow or outflow through using the required rate of return. Further
Damodaran (2011) has depicted that the internal rate of return is a technique of capital
budgeting which is used by the firms to analyze the return in which the NPV of the
investment would be zero. It depicts about a discount rate that leads the net present value of
an investment towards a point where the total cash inflow and the cash outflow of a company
is zero. It has been added by Burns and Walker (2015) that if 2 investments re compared than
the investment with high IRR must be chosen as it would offer more returns to the company.
Further, it has been found that the NPV is more approachable the the IRR by the
companies on the basis of various advantaged of NPV techniques and various drawbacks of
the IRR technique. In addition, it has been added that the performance and the position of the
company also makes an impact over the capital budgeting techniques to choose the best
investment proposal (Bodie, 2013). More, the factors and requirements of the investment and
the organization also affect the decision of choosing the best technique to analyze and make a
result about the best investment proposal method (Bierman and Smidt, 2012).
According to the various secondary sources, it has been found that organizations
whose main motto is to make the profits and enjoy the growth, uses the net present value
techniques to identify that the project must be accepted or not whereas the organizations who
just want to look that on which discount rate the point of cash inflow and outflow would be
similar uses the IRR technique to reach over a conclusion (Barlow, 2006).
Mainly, it has been found that the people go for the net present value technique for its
simplicity and the best outcome whereas the IRR technique is complex to evaluate and reach
over a conclusion. Further, this topic has been evaluated through analyzing a situation in
which the following are the cash inflow and outflow of a company of two projects:
Cash
Outflow
Cash
Inflow