I. Investment Appraisal Should Add Value to the Business Entity
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- Date Submitted: 08/16/2011 03:12 AM
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MBA FOUNDATION PROGRAM
ACCOUNTING & DECISION MAKING TECHNICS ASSIGNMENT
Group A
B0212SZSZ1110
Mustapha BELAROUSSI
17/02/2011
I. Investment appraisal should add value to the business entity?
I do agree with the statement that Investment Appraisal add value to the business entity.
First of all, any business needs funds to start its activity; it is called capital in business language or investment, which will be used to purchase machines, assets or building for the company. Then, the most important goal for any firm is generating profits.
There is a remaining question: why does a company want to make profit?
Here are the many reasons:
➢ Survival of the company
➢ Paying the shareholders
➢ Re-investment
➢ Retained profit
➢ Invest in loss projects
While starting-up, a company needs to take resolutions for making the capital investment, according to the projects over a period of time, that’s why the company should take the decision for a long-term basis.
There are 04 different ways to make an investment on an Investment Appraisal. It is a part of finance:
• ARR= Accounting Rate of Return
• PBP= Pay Back Period
• NPV= Net Present Value
• IRR= Internal Rate of Return
There are two kinds of investment appraisal which are shown below:
Pay Back Period: PBP calculates the time of getting the initial investment back over a period of time. The project with a less PBP is accepted. It is an easier way to calculate the return period.
The PBP, NPV and IRR use cash flows and are considered as objective methods. The ARR uses profits, and is considered as a subjective method.
To conclude with, businesses have to go through this approach to make an efficient decision and follow on competing in this harsh economic climate.
II. What is the payback period of each project?
Definition: The payback period is the length of time required to recover the cost of an investment. It is calculated as:
- Project A:
Y Cash flows Cumulative cash flow...
ACCOUNTING & DECISION MAKING TECHNICS ASSIGNMENT
Group A
B0212SZSZ1110
Mustapha BELAROUSSI
17/02/2011
I. Investment appraisal should add value to the business entity?
I do agree with the statement that Investment Appraisal add value to the business entity.
First of all, any business needs funds to start its activity; it is called capital in business language or investment, which will be used to purchase machines, assets or building for the company. Then, the most important goal for any firm is generating profits.
There is a remaining question: why does a company want to make profit?
Here are the many reasons:
➢ Survival of the company
➢ Paying the shareholders
➢ Re-investment
➢ Retained profit
➢ Invest in loss projects
While starting-up, a company needs to take resolutions for making the capital investment, according to the projects over a period of time, that’s why the company should take the decision for a long-term basis.
There are 04 different ways to make an investment on an Investment Appraisal. It is a part of finance:
• ARR= Accounting Rate of Return
• PBP= Pay Back Period
• NPV= Net Present Value
• IRR= Internal Rate of Return
There are two kinds of investment appraisal which are shown below:
Pay Back Period: PBP calculates the time of getting the initial investment back over a period of time. The project with a less PBP is accepted. It is an easier way to calculate the return period.
The PBP, NPV and IRR use cash flows and are considered as objective methods. The ARR uses profits, and is considered as a subjective method.
To conclude with, businesses have to go through this approach to make an efficient decision and follow on competing in this harsh economic climate.
II. What is the payback period of each project?
Definition: The payback period is the length of time required to recover the cost of an investment. It is calculated as:
- Project A:
Y Cash flows Cumulative cash flow...