Usefulness of Capital Investment Appraisal Measures: A Detailed Report

This report critically examines the usefulness of various capital investment appraisal measures, including the payback period, net present value (NPV), accounting rate of return (ARR), and internal rate of return (IRR), in the context of two investment options, A20 and B25. It provides a detailed interpretation of the results obtained from each method, highlighting the strengths and weaknesses of each project based on the specific appraisal technique. The report also addresses the finance director's confidence in the IRR exceeding 7% for both options, explaining the significance of IRR in evaluating investment opportunities. Ultimately, the report recommends selecting project B25 based on its superior NPV and competitive IRR, despite A20's advantages in payback period and IRR, emphasizing the importance of considering all appraisal methods for informed decision-making. Desklib provides students with access to past papers and solved assignments to aid in their studies.

Accounting for Business

Contents
INTRODUCTION...........................................................................................................................................3
TASK............................................................................................................................................................3
Critically discuss the usefulness of the respective capital investment appraisal measures in the table
above and make a recommendation as to which option should be chosen............................................3
Explain why the finance director was so confident that IRR would be well in excess of 7 % for both
options.....................................................................................................................................................5
CONCLUSION...............................................................................................................................................5
REFERENCES................................................................................................................................................6

INTRODUCTION
Accounting for business describes the process of gathering, evaluating, and understanding
critical data in order to make decisions. In the present environment, it is critical for a firm to have
an effective accrual accounting so it can achieve more effectiveness. In this report consist of
investment appraisal techniques use by the company for selecting best option from two projects.
Along with analysis why finance director confidence for IRR techniques in regard of both
project.
TASK
Critically discuss the usefulness of the respective capital investment appraisal measures
Payback period: It is a way of determining the length of time it would take for the money
spent in the enterprise to be repaid. It is the number of years and continues for the quantity of
revenue to reach break even. It is usually preferable to have a short time frame since it aids in the
company's cash management.
Interpretation: As per the calculation of both projects like A20 and B25, investment amounts are
different such as 100000, 130000 for 5 years. After the calculation get results of 3.67 years from
A20 and 4.17 years from B25. After the analyzing both calculation it is saying that select A20
project for the investment in which get return in shorter time period and less investment as
compare of the B25.
Net present value: This approach is used to predict the price of investment returns for the firm
after a specific period of time. It assists in deciding if the investment dollars is sufficient for
investment. If the NPV is more than zero, it is considered "excellent." 2 After all, the rate of
return in the Calculation process currently includes factors elements like the investor's cost of
equity, relative value, and risk appetite.
Interpretation: This method helps to compare both projects and help to select right project. After
the application of this method it is getting that NPV of A20 is 105700 and B25 is 112400. After
the compare both project results it is saying that select second project in which get greater NPV
results as compare of A20.

Accounting rate of return: It establishes the level of revenue that may be obtained from a
company venture. However, while determining the amount of revenue, it does not taking into
consideration is the fact of cash.
Interpretation: After the application of this method get results are 13% of A20 and 15% of B25.
The average yearly return that estimates during the lifetime of an investment proposal, divided
by the expected level of money spent, is how the ARR is determined. The bigger the annualized
return on investment (ARR), the more appealing the business. From the calculation it is
suggesting that select second project of B25 in which get higher rate of return.
Internal rate of return: The internal rate of return is the investment growth excluding
environmental consequences on operating expenses or projects. It is the cost of borrowing that
ensures the financing activities paid on an initiative equals the cash flow that arrives into the firm
as a consequence of the expenditure. It is measured as a proportion. The required rate of return,
on the other hand, is the cost of borrowing that happens when the asset's total profit reaches zero.
Interpretation: In general, the greater the required rate of return, the more appealing an
investment becomes. The total IRR in this analysis was around 22% across a variety of funds or
property. This means that an individual contribution with a predicted IRR of at least 22% would
be deemed a smart investment. After the application of this method get result of 10.95 from the
A20 and 9.5% from B25. Thus, according to this method suggesting selecting A20 project to get
more returns.
Recommendations: From the overall analysis it is saying that A20 project is good in payback
and internal rate of return. On the other side B25 project good in NPV and ARR. The
management of RT plc use cost of capital 7% for the IRR method which is helping to analysis
the results from both projects. After the analysis all the methods of investment appraisal it is
suggesting to select B25 project because it is provided good net present value and in internal rate
of return get good return which is near to A20 result. Thus, all the methods are indicating that
B25 project is good for the investments and get to good return in shorter period of time.

Explain why the finance director was so confident that IRR would be well in excess of 7 % for
both options
An Endeavour or spending with a strong IRR is expected to bring the organisation
considerable rewards. However, a negative IRR may possibly exist if the developer's investment
returns alternate between positive and unfavorable during its expected duration. A lower IRR
suggests a more complicated cash flow route, perhaps making the metric worthless. The needed
rate of return is used to evaluate capital investments. The IRR is used to compute a project's net
income discount factor (or rate of return), because measures the project's revenue potential. The
IRR is the centre of a player's decision to approve or disapprove a proposition. Whereas if IRR
of a new project exceeds a company's required rate of return, it will almost probably be
approved. Whereas if IRR falls below a certain threshold rate of return, the business should be
discontinued. As per finance authors and professors, most IRR estimates involve reinvestment
expectations which make bad initiatives look good and outstanding endeavours look fantastic.
However, as per a 1999 survey, three-quarters of CFOs use IRR while appraising capital
projects, either or always very often..
CONCLUSION
From the above report it has been concluded that Investment appraisal is a component of the
equity investment, which really the decision is taken by the sponsorship and management
committee to justify a project, plan, or stock's expenditure. It justifies and rationalizes the use of
constrained resources, and it is based on a thorough investment analysis.

REFERENCES
Books and Journal
Bader, A., Al-Nawaiseh, H. N. and Nawaiseh, M. E., 2018. Capital Investment Appraisal Practices of
Jordan Industrial Companies: A Survey of Current Usage. International Research Journal of
Applied Finance. 9(4). pp.146-161.
Camaj, L., 2019. Motivational theories of agenda-setting effects: An information selection and processing
model of attribute agenda-setting. International Journal of Public Opinion Research. 31(3).
pp.441-462.
Florenthal, B., 2019. Young consumers’ motivational drivers of brand engagement behavior on social
media sites: A synthesized U&G and TAM framework. Journal of Research in Interactive
Marketing.
Ladd, B. O., Murphy, J. G. and Borsari, B., 2021. Integration of motivational interviewing and behavioral
economic theories to enhance brief alcohol interventions: Rationale and preliminary examination
of client language. Experimental and clinical psychopharmacology. 29(1). p.90.