ACCOUNTING REPORT

Accounting Report



Accounting report

Introduction

This business report will be assessing four different machines on the basis of their discounted cash flows. Earlier, business used to ignore time value of money which had significant implications on the success and failure of projects. It is now in the best interest of the company to take into account time value of cash flows. On the basis of these discounted cash flows, project appraisal has been done and recommendations are put forward.

Problem

Company Secretary has requested a project appraisal for the four potential machines. Capital cost and cash flows (revenue minus cost) are given in the table below.

 

 

Net cash flow (ALL FIGS IN £000)

 

 

Machine

Year

 

A

B

C

D

0

Capital cost

-80

-100

-120

-140

 

 

 

 

 

 

1

Cash flows

15

35

25

10

2

Cash flows

25

40

35

20

3

Cash flows

25

40

40

50

4

Cash flows

30

15

20

50

5

Cash flows

30

10

10

50

 

 

 

 

 

 

6

Sales Proceeds

10

10

10

50

All figures are estimated on the net cash flows generating during the five years life of the machine and at the end of year 5, machines will be sold at the given prices. The purpose of this report is to assess the advantages of using discounted cash flows over non discounted cash flows and evaluate the proposals for each machine independently to determine the best option available to the company.

Discounted vs Non Discounted Cash flows

Selecting between discounted cash flows upon non discounted cash flows is a critical phase in any project evaluation. Non discounted cash flows are regular cash flows without considering the time. However, in contemporary times, there is much importance given to time value of money which marks the principal distinction between discounted cash flows vs non discounted cash flows. A anon-discount amethod aof acapital abudgeting adoes anot aexplicitly aconsider athe atime avalue aof amoney. aIn aother awords, aeach adollar aearned ain athe afuture ais aassumed ato ahave athe asame avalue aas aeach adollar athat awas ainvested amany ayears aearlier. aThe apayback amethod ais aone aof athe atechniques aused ain acapital abudgeting athat adoes anot aconsider athe atime avalue aof amoney.

Capital Budgeting

Capital abudgeting ais aa arequired amanagerial atool. a aOne aduty aof aa afinancial amanager ais ato achoose ainvestments awith asatisfactory acash aflows aand arates aof areturn. a aTherefore, aa afinancial amanager amust abe aable ato adecide awhether aan ainvestment ais aworth aundertaking aand abe aable ato achoose aintelligently abetween atwo aor amore aalternatives. a aTo ado athis, aa asound aprocedure ato aevaluate, acompare, aand aselect aprojects ais aneeded. a aThis aprocedure ais acalled acapital abudgeting. aThere aare afour amajor atechniques aof acapital abudgeting: apay aback amethod, aProfitability aindex, aIRR aand aNPV.

Net Present Value

NPV ais aa acapital abudgeting atechnique abased aon athe atechniques aof adiscounted acash aflow a(DCF). aIt ais aa amethod afor aevaluating aproposals afor acapital ainvestment aby aobtaining athe apresent avalue aof anet acash aflows ain athe afuture, adiscounted aat athe acost aof aCapital aCompany aor athe arequired arate aof areturn. aPerhaps athe amostly awidely aused atechnique afor aanalyzing aa apotential ainvestment aopportunity aor aproject ais athe anet apresent avalue aof acash aflow aor aNPV aapproach. aUsing athe aNPV aof acash aflow atechnique awe awould adiscount aall acash aflows ain ...