An Accounting and investment techniques project Essay

‘A agencies of measuring whether an investing undertaking is worthwhile or non ‘ hypertext transfer protocol: //www.bized.co.uk Investment assessment is all about measuring those income watercourses against the cost of investing ‘ hypertext transfer protocol: //www.bized.co.uk

Therefore, it had value to the concern entity because it enables Company to make up one’s mind on assorted undertakings. i.e it enables company to do Accept or Reject determination.

‘It enables the company to analyze the viability or otherwise of a undertaking ‘ ( Adeniyi A. Adeniji, 2004 p.415 )

Question Bacilluss:

( I ) To cipher the Pay back period for Undertaking A:

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Year DISCOUNTING CUMMULATIVE

CASH FLOW CASH FLOW

1 22 22

2 31 53

3 43 96

4 52 148

5 71 219

Therefore since we have different hard currency flows for each twelvemonth the Pay Back Period will be:

3years + 29 = 3.1years

52

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( two ) To cipher the Payback period for Undertaking B:

Year DISCOUNTING CUMMULATIVE

CASH FLOW CASH FLOW

1 43 43

2 43 86

3 43 129

4 43 172

5 43 ` 215

Since all the hard currency flows are the same throughout the old ages it is preferred to utilize the Annuity method of ciphering NPV

= 2+ 39 = 2. 1years

43

Undertaking B should be accepted because it is below the targeted period set by the company for the payback period.

QUESTION C:

The followers are the unfavorable judgment of the wage back period:

It does non ever give a dependable determination since it ignores the clip value of money

‘Payback period ignores hard currency flows instantly after the payback period ‘ ( Adeniyi A. Adeniji ( 2004 ) , Management Accounting, Third Edition, Nigeria, Page 423 )

‘The attack ignores the wealth maximization aim of the administration ‘s ( Adeniyi A. Adeniji ( 2004 ) , Management Accounting, Third Edition, Nigeria, Page 423 )

‘The attack ignores the consequence of rising prices on the existent hard currency flow ‘ ( Adeniyi A. Adeniji ( 2004 ) , Management Accounting, Third Edition, Nigeria, Page 423 )

‘Unable to separate between undertakings with same payback period ‘ ( Adeniyi A. Adeniji ( 2004 ) , Management Accounting, Third Edition, Nigeria, Page 423 )

QUESTION D:

To cipher the NPV of Project A

Year NET CASH FLOWS DISCOUNT RATE PRESENT VALUE

12 %

1 22 0.893 19.646

2 31 0.797 24.707

3 43 0.712 30.616

4 52 0.636 33.072

5 71 0.567 40.257

Net PRESENT VALUE AT 12 % 23.298

To cipher the Net Present Value of Project B

Year NET CASH FLOWS DISCOUNT RATE PRESENT VALUE

12 %

1 43 0.893

2 43 1.668

3 43 2.361

4 43 2.974

5 43 3.517

Net Present Value at 12 % = 43,000* 3.605-125,000

= 155,015-125,000

Therefore the Net Present Value at 12 % = 30,015

Undertaking B should be accepted based on the fact it has the highest NPV and therefore is the

best option.

Question Tocopherol:

‘The Net Present Value is the value obtained by dismissing all hard currency escapes and influxs of

a capital investing undertaking by a chosen mark rate of return or cost of capital ‘ . ( Adeniyi A.

Adeniji ( 2004 ) , Management Accounting, Third Edition, Nigeria, Page 424 )

‘It therefore compares the present value of all hard currency influxs from an investing with the

present value of all the hard currency escapes from an investing ‘ ( Adeniyi A. Adeniji ( 2004 ) ,

Management Accounting, ThirdEdition, Nigeria Page 425 )

‘If the NPV is positive, it means that the hard currency influxs from a capital investing will give a

return in surplus of the cost of capital, and so the undertaking should be undertaken if the cost of

capital is the administration ‘s mark rate Of return ‘ . ( Adeniyi A. Adeniji ( 2004 ) , Management

Accounting, Third Edition, Nigeria, Page 426 )

‘If the Net Present Value is negative it means that the hard currency flows from a capital investing

will give a return below the cost of capital, and so the undertaking should non be undertaken if the

cost of capital is the administration ‘s mark rate of return ‘ ( Adeniyi A. Adeniji ( 2004 ) ,

Management Accounting, Third Edition, Nigeria, Page 426 )

‘If the NPV is precisely zero, the hard currency influxs from a capital investing will give a return

which is precisely the same as the cost of capital, and so if the cost of capital is the

administration ‘s mark rate of return, the undertaking will be merely merely deserving undertaken ‘ . ( Adeniyi

A. Adeniji ( 2004 ) , Management Accounting, Third Edition, Nigeria, Page 426 )

Question F:

If the cost of capital increases the Net present value lessenings and moves or tends towards a negative value.

If the cost of capital decreases the Net present value additions and moves or tends towards a positive value.

Question G:

Year ` Net Cash FLOWS DISCOUNT PRESENT VALUE

Rate AT 17 %

1 22 0.855 18.810

2 31 0.731 22.661

3 43 0.624 26.832

4 52 0.534 27.768

5 71 0.456 32.376

128.447

Less Initial Investment 125.000

Net Present Value 3.447

Year ` Net Cash FLOWS DISCOUNT PRESENT VALUE

Rate AT 20 %

1 22 0.833 18.326

2 31 0.694 21.514

3 43 0.579 24.897

4 52 0.482 25.064

5 71 0.402 28.542

118.343

Less Initial investing 125.000

( 6.657 )

Therefore, the closer our Net nowadays values are to zero, the closer our estimation will be to the true internal rate of return.

We shall now utilize the two Net present value calculated earlier to gauge the internal rate of return.

Net present value at 17 % for undertaking A = 3.447, at 20 % for undertaking A = ( 6.657 )

The expression to use is:

Rate of return = A + [ P * ( B-A ) ]

P+N ( Adeniyi A. Adeniji ( 2004 ) , Management Accounting, Third Edition, Nigeria, Page 423 )

Where A is the lower rate with a positive Net nowadays value

B is the higher rate with a negative Net nowadays value

P is the sum of positive Net nowadays value

N is the sum of the Negative Net nowadays value

Internal Rate of return = 17 % + [ 3.447 * ( 20-17 ) ] %

3.447+6.657

= 17 % + 3.447 * 3 %

10.104

= 17 % + 1.023

= 18.023 %

Undertaking B:

Year ` Net Cash FLOWS DISCOUNT PRESENT VALUE

Rate AT 17 %

1 43 0.854

2 43 0.731

3 43 0.624

4 43 0.533

5 43 0.456

3.199

At 17 % = 43.000 * 3.199 – 125.000

= 137.557 – 125.000

= 12.557

Since we have a positive Net present value at 17 % Lashkar-e-Taiba us seek at 20 % =

Year ` Net Cash FLOWS DISCOUNT PRESENT VALUE

Rate AT 20 %

1 43 0.833

2 43 0.694

3 43 0.579

4 43 0.482

5 43 0.402

2.991

At 20 % = 43.000 * 2.991 – 125.000

= 128.613 – 125.000

= 3.613

Since we are a small closer to a Negative value let us seek 25 %

Year ` Net Cash FLOWS DISCOUNT PRESENT VALUE

Rate AT 25 %

1 43 0.800

2 43 0.640

3 43 0.512

4 43 0.409

5 43 0.328

2.689

At 25 % = 43.000 * 2.689 – 125.000

= 115.6528-125.000

= ( 9.3472 )

We shall now utilize the two Net present value calculated earlier to gauge the internal rate of return.

Net present value at for undertaking B = 3.613 at 20 % , at 25 % = ( 9.3472 )

The expression to use is:

Rate of return = A + [ P * ( B-A ) ]

P+N ( Adeniyi A. Adeniji ( 2004 ) , Management Accounting, Third Edition, Nigeria, Page 423 )

Where A is the lower rate with a positive Net nowadays value

B is the higher rate with a negative Net nowadays value

P is the sum of positive Net nowadays value

N is the sum of the Negative Net nowadays value

Internal Rate of return = 20 % + [ 3.613 * ( 25-20 ) ] %

3.613+9.347

= 20 % + 3.613 * 5 %

12.960

= 20 % + 0.0139

= 20.013 %

Therefore, since the Internal rate of return investing regulations states that where the internal rate of return exceeds the cost of capital we should accept the undertaking, so project B with greater per centum of internal rate of return than undertaking A should be accepted.