Accounting for Business: Capital Investment Appraisal and IRR

This report critically evaluates capital investment appraisal methods, focusing on their usefulness in business accounting. It analyzes different investment options for RT plc using metrics like accounting rate of return, payback period, net present value, and internal rate of return (IRR). The report recommends investment in option A20 based on its favorable payback period and IRR. It also explains the finance director's confidence in IRR exceeding 7%, linking it to the cost of capital. The discussion emphasizes the importance of these appraisal methods in making informed investment decisions and highlights the benefits and drawbacks of each approach. The report concludes that understanding and applying these accounting principles are crucial for business growth and profitability. Desklib provides additional solved assignments and resources for students studying finance and accounting.

Accounting for Business

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Q1.....................................................................................................................................................3
Critical discussion of usefulness of capital investment appraisal measured and recommending
better option................................................................................................................................3
Q2.....................................................................................................................................................4
Explaining reason behind finance director being confident relating to IRR will be more than 7
%.................................................................................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Accounting is very important for the business to work and analyse that whether company
is earning good amount of profit or not. For the business to run successfully it is necessary that
they expand the business so that it is growing and developing. Thus, the current report will
outline the usefulness of different capital investment appraisal techniques so that the business
can grow effectively. Along with this the report will outline the reason behind confidence of
finance director that the IRR will be more than 7 %.
Q1
Critical discussion of usefulness of capital investment appraisal measured and recommending
better option
Options Initial
investment
Accounting
rate of return
Payback
period
Net present
value
Internal rate
of return
A20 £1000000 13% 3.67 years £105700 10.9%
B25 £1300000 15% 4.17 years £112400 9.5%
The above data provides the information of both the option and result of different capital
investment options being applied. All the investment appraisal methods are important for
analysis of various options in which RT plc can invest for the growth of the company. With
respect to the accounting rate of return the project B25 is more beneficial because when the ARR
will be higher than the project will be more attractive (Siziba and Hall, 2021). Moreover, with
the help of the payback period it is clear that A20 project is much better. The reason behind this
fact is that when the payback is less than this outline the fact that company will get its invested
amount within the time frame of 3.67 years. Whereas in case of B25 the payback period of 4.17
years which is more than other project. Furthermore, with help of the net present value it is clear
that the project B25 is better. This is because of the reason that the net present value outlines the
fact that what is the present value of the future return. Along with this the internal rate of return
is better for the project A20 that is 10.9 % and it is low for B25 that is 9.5%.
Thus, with the overall analysis of all the capital investment option it is clear that the
project A20 is worth investment. The reason behind this fact is that the payback period and the
internal rate of return is more as compared to the other project. On the other hand, the other

project that is B25 is also having two things better that is accounting rate of return and net
present value. But on comparison it was evident that the initial investment is less for A20 and the
IRR is more and due to this reason it is advisable to RT plc that they must invest in project A20.
As per the views of Lefley (2018) usefulness of capital investment methods is very high
because it assists in analysing the investment option in better and effective manner. With the help
of accounting rate of return the company can evaluate the average rate of return which business
can generate over the life of investment. Along with this, the ARR is assistive for company in
deciding the fact that whether the option of investment is viable and profitable or not. Moreover,
as per the views of Fatimah and Kartikaningsih (2020) NPV is useful to the company in
analysing and calculating the present value of future return which company might earn. Under
this method the cash flows are being discounted to the present value in order to evaluate that
what returns will be earned in the future at current value.
On the other hand, Hazen and Magni (2021) articulates the fact that use of IRR that is
internal rate of return is being undertaken for determining the fact that whether the project is
having the potential for investment or not. This is necessary because of the reason that in case the
IRR will be low then this implies that company is not having good returns. In against of this
Warren and Seal (2018) states that the payback period method is also very useful in deciding the
fact that whether the investment is viable or not. This is because of the reason that with help of
payback period the company can evaluate that how much time will it take to recover the cost of
the investing in a particular project. Hence, with this discussion it can be stated that all the
capital investment methods are essential for evaluating the work in better and effective manner.
Before finalising any of the project it is necessary for company to evaluate those investment
option on the basis of these capital investment methods.
Q2
Explaining reason behind finance director being confident relating to IRR will be more than 7 %
In the present case of RT plc, the finance director of company is confident that IRR will
be more than 7 %. The reason behind this fact is that it is always present that return must be
higher than the cost (Advantages and Disadvantages of Internal Rate of Return (IRR), 2022).
Hence, due to this reason the director is confident that the return will be more than 7 %. In the
present case the cost of capital is 7 % and this implies that the cost incurred for the investment

will be 7 %. Thus, because of this reason only the finance director is confident that the IRR will
be more than the cost of capital that is 7 %. Further, in case the IRR would be less than the cost
that is 7 % then the project would have been rejected as return is low then the cost levied.
CONCLUSION
In the end it is inferred that use of accounting is necessary for any business to evaluate
the fact that whether the company is performing in better terms or not. The above discussion
stated that investment in option A20 is better for RT plc. The reason was that the initial
investment is less and also the payback period is low and IRR is higher. This implies that
company will be earning more return as compared to the other option. Further it was analysed
that the finance director was confident for IRR to be more than 7 % because the return is always
more than the cost incurred.

REFERENCES
Books and Journals
Fatimah, N. and Kartikaningsih, D., 2020. ANALYSIS OF RENT, BUY AND RENT-TO-BUY
WITH NET PRESENT VALUE METHOD IN THE DECISION OF TRUCK
PROCUREMENT AT PT. XYZ. Journal of Islamic Economics Perspectives. 2(1). pp.48-
65.
Hazen, G. and Magni, C. A., 2021. Average internal rate of return for risky projects. The
Engineering Economist. 66(2). pp.90-120.
Lefley, F., 2018. Dispelling the Myth Around the Financial Appraisal of Capital Projects. IEEE
Engineering Management Review. 46(1). pp.47-51.
Siziba, S. and Hall, J. H., 2021. The evolution of the application of capital budgeting techniques
in enterprises. Global Finance Journal. 47. p.100504.
Warren, L. and Seal, W., 2018. Using investment appraisal models in strategic negotiation: The
cultural political economy of electricity generation. Accounting, organizations and
society. 70. pp.16-32.
Online
Advantages and Disadvantages of Internal Rate of Return (IRR). 2022. [Online]. Available
through: <https://efinancemanagement.com/investment-decisions/advantages-and-
disadvantages-of-internal-rate-of-return-irr>