Investment Appraisal Techniques and Approaches to Pricing - Management Accounting

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
A) Calculation of Net present value.......................................................................................1
B) Calculation of IRR.............................................................................................................1
C) Limitation of various techniques of proposed investments...............................................1
D) Comparison of two approaches to making capital budgeting decisions by means of
discounted cash flow..............................................................................................................2
E) Another two methods of investment appraisals.................................................................2
F) Can non-monetary aspects are useful to make various decisions related to the investment
projects...................................................................................................................................3
G) Four methods used in investment appraisals are...............................................................3
H) Various approaches to pricing...........................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6
APPENDIX......................................................................................................................................7

INTRODUCTION
Management accounting is the process of preparing various financial accounts and
reports in order to analyze the accurate and timely based financial and statistics data which are
required by managers to make day-to-day decisions in order to achieve the short term and long
term objectives of the company. Investment appraisal is a collection of various techniques that
are used to identify the attractiveness of investment. In this report, case study of KingtonTech
Ltd. has being used in order to calculate the NPV and IRR. In this report, two approaches are
compared to make various capital budgeting decisions. In this, methods of investment appraisals
are also discussed.
MAIN BODY
A) Calculation of Net present value
[Enclosed in appendix]
B) Calculation of IRR
[Enclosed in appendix]
C) Limitation of various techniques of proposed investments
The acceptability of proposed investment is that NPV is positive, thus it can be suggested
as a proposed investment in financial terms. In the above calculation, IRR is 16% and discounted
rate of return is only 12% which indicate that IRR is more as compared to discounted rate that is
used. Thus, proposed investment can be financially accepted (Carmichael, 2011). It can be said
that cash flow of the proposed investment in terms of Alpha is inevitable as there is only one
IRR. Therefore, limitation of investment in Alpha is that evaluation of IRR and NPV is highly
reliant on the production and sales volume. Thus, Kingston Tech Ltd. should analyze and
investigate the assumption that is underlying the production and sales volume. Thus one of the
main limitations of NPV is that it requires an estimated cost of capital in order to calculate Net
present Value and at the same time, cash flows should be in terms of dollars not in the term of
percentage. Likewise, the method of IRR cannot be used in a situation in which sign of the cash
flows of a project changes continuously.
1