QUESTION
Management Accounting Assignment
Subject | Business | Pages | 3 | Style | APA |
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Answer
Management Accounting Assignment
Question 1
Accounting rate of return formula is average annual profits divided by average investment by the company (Al-Mutairi, Naser & Saeid, 2018).
Average annual profits= (£15,000+£25,000+£25,000+£20,000+£30,000)/5=£23,000
Average Investment= (£115,000+£25,000)/2=£70,000
Accounting rate of return=£23,000/£70,000=32.86%
Question 2
2.1:
Payback period is the duration taken to recover initial funds used in an investment. The shorter the payback period the better (Al-Mutairi, Naser & Saeid, 2018). The potential investment with the shorter payback period should therefore be pursued in this case.
2.2:
The disadvantages of using payback period approach are that it does not take into account the time value of money, does not take into account cash flows beyond the payback period and is unrealistic as it ignores normal business scenarios (Gul, Gul & Haider, 2018).
Question 3
3.1:
Investment X appear more lucrative as it generates more cash flows than Investment Y over the lifetime of the investments.
3.2
Investment X |
Discount factor -8% |
Net present value |
Cash flow Year 1: £400,000 |
0.926 |
£370,400 |
Cash flow Year 2: £500,000 |
0.857 |
£428,500 |
Cash flow Year 3: £500,000 |
0.794 |
£397,000 |
Cash flow Year 4: £600,000 |
0.735 |
£441,000 |
Cash flow Year 5: £600,000 |
0.681 |
£408,600 |
TOTAL: |
|
£2,045,500 |
Net Present Value of X =£2,045,500-£1,200,000=£845,500 |
Investment Y |
Discount factor-8% |
Net present value |
Cash flow Year 1: £900,000 |
0.926 |
£833,400 |
Cash flow Year 2: £400,000 |
0.857 |
£342,800 |
Cash flow Year 3: £500,000 |
0.794 |
£397,000 |
Cash flow Year 4: £600,000 |
0.735 |
£441,000 |
TOTAL: |
|
£2,014,200 |
Net Present Value of X =£2,014,200-£1,100,000=£914,200 |
3.3
The business should pursue Investment Y because as it returns a higher net present value of £914,200 as compared to investment X whose net present value is £845,500
Question 4
It implies that the internal rate of return is higher than 8% as the net present value should be equal to zero (Onuorah,2019).
References
Al-Mutairi, A., Naser, K., & Saeid, M. (2018). Capital budgeting practices by non-financial companies listed on Kuwait Stock Exchange (KSE). Cogent Economics & Finance, 6(1) doi:http://dx.doi.org/10.1080/23322039.2018.1468232 Gul, S., Gul, H., & Haider, M. (2018). The review and use of capital budgeting investment techniques in evaluating investment projects: evidence from manufacturing companies listed on Pakistan Stock Exchange (PSE). City University Research Journal, 8(2), 247-260. Retrieved from https://www.proquest.com/scholarly-journals/review-use-capital-budgeting-investment/docview/2102341540/se-2?accountid=45049 Onuorah, A. C. (2019). Appraisal of capital budgeting techniques and performance of manufacturing firms in Nigeria. Journal of Management Information and Decision Sciences, 22(4), 462-470. Retrieved from https://www.proquest.com/scholarly-journals/appraisal-capital-budgeting-techniques/docview/2424965589/se-2?accountid=45049
Appendix
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