Analyzing Capital Budgeting Techniques for Investment Decisions

This report provides an analysis of capital budgeting techniques used in accounting for making informed investment decisions. It compares two project alternatives using methods like Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Accounting Rate of Return (ARR) to determine the most profitable project. The report evaluates the importance of investment appraisal techniques in long-term business profitability and assesses the strategic implications of IRR, ultimately recommending Project A20 based on its superior NPV. Desklib offers a platform where students can find similar solved assignments and past papers for their studies.

Accounting for
Business

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
1. Explain various uses of Capital Budgeting techniques and also explain the reason behind
selecting the project.....................................................................................................................3
2. Examine the reason behind the comment of the Director regarding the rate of IRR..............5
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Investment Appraisal is used to study the profitability of an Investment plan over its life
cycle. It also helps in determining the various alternatives for the investment purpose to be
considered (Ruggeri and et.al., 2020). In the following report, 2 future project alternatives have
to be compared to know which one is best among them. This includes various Capital Budgeting
techniques which include ARR, Net Present Value, IRR and Pay Back Period. It also includes
the Director's comment on the IRR of the company.
MAIN BODY
1. Explain various uses of Capital Budgeting techniques and also explain the reason behind
selecting the project.
Investment Appraisal Technique includes various techniques namely Net Present Value,
Payback period and Accounting Rate of Return. One of the foremost objectives of this technique
is the amount of profit the organisation will be able to earn with the project. It states the period in
which the business concern will be able to recover its initial investment. These activities are
carried out to know the profit the company will be able to earn from the investment plan.
Investment Appraisal Techniques
Payback Period This method helps in determining the time taken by the project to
recover the initial outlay.
Accounting Rate of Return This rate helps in determining the rate of return.
Net Present Value It helps in determining the present value of the future inflows.
Internal Rate of Return This method determines the value of inflows at discounting rates
(Singh, Singh and Khan, 2019).
Profitability Index This helps in determining the net value derived from the project.
Discounted Payback Period This method depicts the present value after considering the
discounting value.
Importance of Investment Appraisal Techniques.

Investment Appraisal Technique is a process to determine long term perspective and
business profitability. This decision is related to investment and financial commitment. It is also
known as Capital Budgeting.
 Huge Investment: Business needs a huge amount of money for investment for the
advancement of technology and technological advancements. For these investment
appraisals, different projects are planned that fulfil the requirement of the administration.
These projects are properly assessed by the management with various investment
appraisal techniques to check whether these activities will be profitable or not. It also
ascertains the period in which the initial investment will be recovered.
 Long Term Investment: These are the projects which have a period of more than 1 year.
These Projects are executed after properly reviewing the alternatives available.
 Extensive run Business: Businesses are of the view that they will carry out their
business operations for a period that cannot be defined. By the use of new and innovative
ideas, the company tries to reduce its cost of production and the overall cost of the
product.
Recommendation of the project:
Among the various projects, the Investment appraisal technique suggests the best project
to be selected,
Accounting Rate of Return: In this technique, the business concern governs the long-term
profit motive of the business concern. The more the turnover of the company that will
ultimately increase the profits of the organisation which will lead to increase in the ARR. In
the following case, the company will select Project B25 as it gives a return of 15% which is
more than Project A which is 13%. This means that Project B25 is more profitable than
Project A20 (Alsuwaidi and et.al., 2020).
Payback Period: This technique states the period in which the company is being able to take
out the initial invested amount in a project. Among these projects Project B25 takes 4.17
years to recoup the amount invested while Project A20 takes 3.67 years to recover its initial
outlay which is slightly low as compared to Project B25. This implies that Project A20
should be selected according to this technique.
Net Present Value: This method states the present value of future inflows of the projects
which are derived after deducting the present value from the initial investment. In the

following case Project, A20 Net present value is positive which means that the company will
be able to earn that much amount of profit in terms of today's profitability. Project B25 value
is negative which means that the company will not be able to earn any profits throughout the
project. Thus, according to this technique Project, A20 should be selected.
Internal Rate of Return: A project is considered profitable when it pays greater than the
amount invested in the project. According to this technique Project, A20 should be
considered as it helps in generating more amount of money as compared to Project B25.
The above techniques help in determining the projects that need to be considered while
selecting the techniques. According to this, Project A20 should be selected as the Net Present
Value of this project is more and it will provide the maximum profits to the organisation
(Arnold and Lewis, 2019).
2. Examine the reason behind the comment of the Director regarding the rate of IRR.
The IRR of Project A20 is 9.5% and Project B25 is 10.9% which means that the company
will earn more returns in Project B25. In this technique discounting factor is considered
which provides the actual return the company will be able to earn from the project
(Chandramohan, Perera, and Dewagoda, 2020). The strategic position of the business also
helps in predicting the future earnings of the organisation. This would have helped the
Director in stating that the IRR will be nevertheless from 7%.
CONCLUSION
From the above report, it can be concluded that Investment appraisal techniques are used by
the business organization to know the project’s profitability and the period in which the
investment will be recovered. In the above Project, A20 should be considered for investment
because its Present value is more than the other project.

REFERENCES
Books and Journals
Alsuwaidi, M. and et.al., 2020, October. Performance appraisal on employees’ motivation: A
comprehensive analysis. In International Conference on Advanced Intelligent Systems
and Informatics (pp. 681-693). Springer, Cham.
Arnold, G. and Lewis, D.S., 2019. Corporate financial management. Pearson UK.
Chandramohan, A., Perera, B.A.K.S. and Dewagoda, K.G., 2020. Diversification of professional
quantity surveyors’ roles in the construction industry: the skills and competencies
required. International Journal of Construction Management. pp.1-8.
Ruggeri, A.G. and et.al., 2020. Planning energy retrofit on historic building stocks: A score-
driven decision support system. Energy and Buildings, 224, p.110066.
Singh, C.D., Singh, R. and Khan, A.A., 2019. Evaluating the strategic potential of AMT in
Indian manufacturing industries. International Journal of Management Concepts and
Philosophy. 12(1). pp.80-101.