A Breakdown of Investment Appraisal Methods, Associated Questions and Answeress
LONDON SCHOOL OF COMMERCE. | ASSIGNMENT ON ACCOUNTING AND DECISION MAKING TECHNIQUES | | QUINCY | 4/20/2011 |
(A) Why is investment appraisal process so important?
Answer
Capital investment involves the commitment of large amounts of company resources, which will necessitate careful evaluation to be undertaken before a decision is reached. The investment appraisal process helps managers make the right investment decisions as regards what projects to invest in to maximize shareholders wealth in the long and short run.
Seeing how difficult and extremely expensive it would be to reverse an investment decision, the investment appraisal process equips one with strategic and tactical skill-set to exercise care in making informed initial investment decisions.
Also, as projected future benefits and cost are difficult to predict the risk and uncertainty of taking a medium to long-term investment can be high. The knowledge of Capital investment process can help non-accountants better interpret information and constructively question recommendations received from their accounts so as to make the appropriate investment decision as opposed to just doing what they are told by the accountant.
(B) Calculate the payback period for project A.
Payback period is defined as the amount of time it takes for a project to pay for itself or the length of time it take to recover the cost of an investment.
PROJECT A
Initial Investment: The amount of money a business invests in a capital investment project. It can be sourced from various means such as banks or shareholders funds.
It is given as ₤115,000
NO OF YEARS(YR) | NET CASH FLOW (NCF) | CUMMULATIVE NET CASH FLOW(CNCF) | 1 | 38,000 | 38,000 | 2 | 42,000 | 80,000 | 3 | 48,000 | 128,000 | 4 | 50,000 | 178,000 | 5 | 70,000 | 248,000 |
Payback period = 2 + 115,000 − 80,000 48,000 = 2 + 35,000
(A) Why is investment appraisal process so important?
Answer
Capital investment involves the commitment of large amounts of company resources, which will necessitate careful evaluation to be undertaken before a decision is reached. The investment appraisal process helps managers make the right investment decisions as regards what projects to invest in to maximize shareholders wealth in the long and short run.
Seeing how difficult and extremely expensive it would be to reverse an investment decision, the investment appraisal process equips one with strategic and tactical skill-set to exercise care in making informed initial investment decisions.
Also, as projected future benefits and cost are difficult to predict the risk and uncertainty of taking a medium to long-term investment can be high. The knowledge of Capital investment process can help non-accountants better interpret information and constructively question recommendations received from their accounts so as to make the appropriate investment decision as opposed to just doing what they are told by the accountant.
(B) Calculate the payback period for project A.
Payback period is defined as the amount of time it takes for a project to pay for itself or the length of time it take to recover the cost of an investment.
PROJECT A
Initial Investment: The amount of money a business invests in a capital investment project. It can be sourced from various means such as banks or shareholders funds.
It is given as ₤115,000
NO OF YEARS(YR) | NET CASH FLOW (NCF) | CUMMULATIVE NET CASH FLOW(CNCF) | 1 | 38,000 | 38,000 | 2 | 42,000 | 80,000 | 3 | 48,000 | 128,000 | 4 | 50,000 | 178,000 | 5 | 70,000 | 248,000 |
Payback period = 2 + 115,000 − 80,000 48,000 = 2 + 35,000