ACCOUNTING ASSIGNMENT

Accounting assignment

Accounting assignment

Task 4

Calculations of project # 1

Cash flows

Pv factors at 10 percent

Present value

Pv factor at 20

percent

Present value

18,000

0.909

16362

0.8333

14999.4

20,000

0.826

16520

0.694

13880

25,000

0.751

18775

0.579

14475

38,000

0.683

25954

0.482

18316

45,000

0.621

27945

0.402

18090

105556

79760.4

NPV 1= Initial investment - present value of cash flow

= 80000 - 105556

= -25556

NPV 2= Intial investment - present value of cash flow

= 80000 - 79760.4

= 239.6

IRR = 0.1 + 25556/(25556+239.6) * (0.2-0.1)

= 0.1 + 0.9907 *(0.1)

IRR = 19.90 %

Pay back period = initial investment/periodic cashflow

= 3 + 17000/38000

= 3.44 years

ARR = Average accounting profit/ initial investment

= (18000+20000+25000+38000+45000)/5/80000

= 36.5 %

Calculation of project # 2

Initial investment = $120000

Cash flows

Pv factors at 10 percent

Present value

Pv factor at 20

percent

Present value

30,000

0.909

27270

0.8333

24999

50,000

0.826

41300

0.694

34700

50,000

0.751

37550

0.579

28950

50,000

0.683

34150

0.482

24100

15,000

0.621

9315

0.402

6030

149585

118779

NPV 1= Initial investment - present value of cash flow

= 120000 - 149585

= 29585

NPV 2= Intial investment - present value of cash flow

= 120000 - 118779

= 1221

IRR = 0.1 + 29585/(29585+1221) * (0.2-0.1)

= 0.1 + 0.9603 *(0.1)

IRR = 19.60 %

Pay back period = initial investment/periodic cashflow

= 2 + 40000/50000

= 2.8 years

ARR = Average accounting profit/ initial investment

= (30000+50000+50000+50000+15000)/5/80000

= 32.5 %

Selection of project

After computation the net present value, payback period, internal rate of return, and accounting rate of return of both the project, it was observed that both the proposed project will increase the value of the company, and will prove to be fruitful in the longer period. However based on the above calculation my advice for the management is that it should select project 2 for investment, mainly because this project will cover its investment in around 3 years, it NPV is positive, and IRR is below the estimated cost of investment rates. Most importantly, this project will prove to a significant addition in the product line of the company.

Task 4

Importance of financial statements

Financial statements are practised to cater the needs of different peoples in analysing the firm performance and decision-making. The possible users of financial statements are management of the firm, shareholders of the company, suppliers and creditors of the company, authorities of tax, trade unions and employees, financial analysts, customers, press regulatory authorities, government, stock exchange, and the general public. Management of the company uses three common financial statements (balance sheet, income statement, and cash flow statement) for decision-making and evaluating firm's performance.

First, is the balance sheet that provides management information regarding the position of assets and liabilities of the Company. Asset side of the ...