ACCOUNTING REPORT

Accounting Report

Accounting Report

Purpose and value of capital investment appraisals

Capital investment appraisals are basically capital budgeting techniques used to evaluate the different investment opportunities with a common goal of increasing the accounting profit (Collis et al., 2012). So, in order to evaluate the available different investments, the purpose of every investor is to make most out of the money he or she has at his/her end. Then the question arises how one can increase the accounting profit of the investment he or she exposed to? The various techniques are available to solve this question, these techniques are used to evaluate the investment opportunity keeping in view the different factors such as the rate of return required, the cash inflows from particular project, the time period required to cover the investment project, discount factor etc. these all are factors which an investors keeps in his or her mind before going to make an investment in particular project (Gardner, 1998).

The value of investment appraisals is clear and obvious, as in case of the current investors; he has the limited amount of redundancy payment. So he has the choice to invest in either of the project, both the project serve different specifications in terms of investment outflow, cash inflow, time period, value of the investment etc. Hence, one cannot invest in any project without analyzing the particular investment opportunity as the time value of money is important to every individual (Collis et al., 2012). So, investing in either of the project affects the business in the future because of the cash flow generations from the particular investment. This is why most of the investors use multiple techniques to evaluate particular investment opportunity.

Calculations

Project Vicarage

Investment Reports on Vicarage Investment

Payback in years & months

4

years

3

months

Discounted Payback FDR in years and months

5

years

7

months

Accounting Rate of return (%)

25.60%

-26431

0.87

7.39%

N P V

Profitability Index FDR (PI)

Internal Rate of Return (IRR)

Accounting rate of return (Project Vicerage):

=Average (15,000+45000+60000+65000+71000)/200000

= 25.60%

Comment:

The accounting rate of return in the above project is around 26%, which can be considered good as it is easy to calculate. The only limitation of this technique is that it ignores the time value of money. Hence, we cannot rely on the 26% of accounting return it might result in loss when considering NPV technique.

Payback Work Area

Year no.

1

2

3

4

5

Incomes

15000

45000

60000

65000

71000

Cum Cash

15000

60000

120000

185000

256000

Year no.

1

2

3

4

5

Amount after

4

years

185000

3

Amount remaining

15000

Value payable in following year

71000

Part of year for remaining amount

3

months

Discounted Payback Work Area

Fixed Rate of Interest

12.00%

Year no.

1

2

3

4

5

Cash-Flow

15000

45000

60000

65000

71000

DCF OF CASH-IN

13393

35874

42707

41309

40287

Cumulative DCF

13393

49267

91973

133282

173569

Year no.

1

2

3

4

5

Amount after

5

years

173569

Amount remaining

26431

Value payable in following year

40287

Part of year for remaining amount

7

months

Old Forge

Investment Reports on Olde Forge

Payback in years & months

3

years

8

months

Discounted Payback FDR in years and months

4

years

8

months

Accounting Rate of return (%)

31.33%

N P V

7698

Profitability Index FDR (PI)

1.06

Internal Rate of Return (IRR)

14.12%

Accounting rate of return (Project Vicerage):

=Avg. (12000+32000+45000+48000+51000)/120000

=31.33%

Comment:

The accounting rate of return in the other project is around 31%, which sounds good. The only limitation of this technique is that it ignores the time value of money. Hence, we cannot rely on the 31% of accounting return, and we have ...