MANAGEMENT ACCOUNTING

Management Accounting

Management Accounting

Introduction

Investment appraisal methods (IAM) are a decision-making support tool widely used to evaluate projects in monetary terms. IAM is used to assess projects viability, significance, and importance in terms of profitability, return on investment, and subjective benefit in terms of growth. The decision making should include a comprehensive account of costs and benefits associated with each project. IAM aims to provide a balance sheet of these costs and benefits by taking into account the long-term impacts of an evaluated project in terms of financial returns (Bateman et al., 2004). IAM contrasts the costs and benefits of the project over its anticipated lifespan by discounting the future value of money. Essentially, the aim of cost benefit analysis under investment appraisal method is to provide a net present value of the benefit-cost ratio. There are various methods or models of investment appraisal. These include: -

a. Pay-Back and Recovery time.

b. Accounting rate of return

c. The discounted Payback period.

d. The Net Present Value (NPV)

e. Profitability Index

f. The Internal Rate of Return (IRR)

The use of each of these criteria will enable the acceptance or rejection of independent projects analyzed. The financial evaluation of projects allows comparing the benefits generated by it, associated with the funds coming in the form of cash returns and their respective current annual outlays of amortization and interest expenses. Financial evaluation methods are characterized by determining feasible alternatives or optimal investment using inter Alia the following indicators: NPV (Net Present Value), IRR (internal rate of return), ARR (accounting rate of return), and Benefit-to-Cost Ratio (Boardman et al., 2006).

Payback Period

Payback period is the total number of years that the company takes to recoup the initial investment. This method selects projects that provide rapid recovery of initial investment. Therefore, shorter payback period of investment shows that the project is better (Copeland et al., 2000). The payback period of the investment is used to evaluate the proposed project. A key reason for using the payback period as a decision criterion or as a supplement to the decision criteria is that this period represents a measure of risk. The recovery period of an investment reflects the liquidity of a project. The more liquid an investment, it is supposed to be the less risky, and vice versa.

NPV Net Present Value

The NPV decision method accounts for the size of the original investment by calculating the investment's estimated final value assuming a required rate of return. Time 0 include the initial investment as a negative cash flow (Copeland et al., 2000). This method yields the expected gain or loss from an investment assuming that the required rate of return is met. This value is obtained by subtracting the initial investment in a project of the present value of cash inflows discounted at a rate equal to the cost of capital of the company. Only if all of capital flows, both inputs and outputs are measured in terms of cash present, can perform valid comparisons. The NPV measures the profitability of the project less the investment ...