Presentation on theme: "Research question To what extent has investment assessment assisted a business to enhance its wealth."— Presentation transcript:
Research question To what extent has investment assessment assisted a business to enhance its wealth
Managing the investment decision Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Determine investment funds available Identify profitable project opportunities Evaluate the proposed project Approve the project Monitor and control the project
Analysing methods variable costing[marginal costing] investment appraisal methods Accounting Rate of Return [ARR] Payback period [PP] Net present value [NPV] Internal Rate of Return [IRR] Return on investment [ROI]
variable costing A costing method that uses only variable cost to determine the cost of goods or services. Fixed cost is not linked to cost units and is treated as a period cost.(p130)
Investment appraisal methods Discounted cash flow methods Net present value Internal rate of return Accounting rate of return Payback period Non-discounted cash flow methods
WHAT DOES THE ARR MEAN? It looks at performance in advance – it assess the potential performance of an investment If the ARR is equal to or greater than the required rate of return, the project is acceptable. If it is less than the desired rate, it should be rejected. When comparing investments, the higher the ARR, the more attractive the investment. [ Over one-half of large firms calculate ARR when appraising projects.
PP the time taken for the initial outlay for an investment to be repaid from its future net cash inflow.
NPV is a method of investment appraisal based on the present value of all relevant cash flows associated with an investment.
NPV If competing projects have positive NPVs, the one with the highest NPV is selected If project NPV is positive, it should be accepted; if it is negative, it should be rejected
Why NPV is better than ARR and PP The whole of the relevant cash flows The objectives of the business The timing of the cash flows NPV fully addresses each of the following:
IRR the discount rate for an investment that will have the effect of producing a zero NPV
ROI A divisional performance measure. The operating profit of a division expressed as a percentage of the business’s investment in the division.(p398)
Possible difficulties Misleading of by the figure Lack of data in real life example