Research question To what extent has investment assessment

Managing the investment decision Stage 1 Determine investment funds available Stage 2 Identify profitable

Analysing methods • variable costing[marginal costing] • investment appraisal methods Accounting Rate of Return

variable costing A costing method that uses only variable cost to determine the cost

Investment appraisal methods Discounted cash flow methods Net present value Internal rate of return

WHAT DOES THE ARR MEAN? • It looks at performance in advance – it

PP • the time taken for the initial outlay for an investment to be

NPV • is a method of investment appraisal based on the present value of

NPV If project NPV is positive, it should be accepted; if it is negative,

Why NPV is better than ARR and PP NPV fully addresses each of the

IRR • the discount rate for an investment that will have the effect of

ROI • A divisional performance measure. The operating profit of a division expressed as

Possible difficulties • Misleading of by the figure • Lack of data in real

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Research question To what extent has investment assessment assisted a business to enhance its wealth

Managing the investment decision Stage 1 Determine investment funds available Stage 2 Identify profitable project opportunities Stage 3 Evaluate the proposed project Stage 4 Approve the project Stage 5 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. (p 130)

Investment appraisal methods Discounted cash flow methods Net present value Internal rate of return Non-discounted cash flow methods Accounting rate of return Payback period

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 project NPV is positive, it should be accepted; if it is negative, it should be rejected If competing projects have positive NPVs, the one with the highest NPV is selected

Why NPV is better than ARR and PP NPV fully addresses each of the following: The timing of the cash flows The whole of the relevant cash flows The objectives of the business

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. (p 398)

Possible difficulties • Misleading of by the figure • Lack of data in real life example