Four Method of Evaluation-Btechnd

Briefly discuss the advantage and disadvantage of the four method of evaluation mentioned in (1) above.

Average rate of return

Advantage- This method measures profitability of the project in terms of net profit earned from the project. Accounting profits are used for the calculation therefore more reliable results can be there.

Disadvantage- Present value is not used for the calculation of ARR therefore results may be misleading.It is not adequate base for decision making process.

Pay-back Period

Advantage- Liquidity in the capital project is measured and used in decision making process. It provide base for decision making in terms of recovery of initial investment.

Disadvantage- This method does not uses present valueconcept while calculating payback period. Once payback period is calculated then post payback period’s cash flows are ignored i.e. is not considered at all.

Net Present Value

Advantage- NPV is the method under which profit of the project is calculated by using present value concept and this makes NPV more reliable method.NPV is easy to use method in decision makingprocess(Gallo, Refresher on Net Present Value 2014).

Disadvantage- NPV method does not proved adequate base for decision making in mutually exclusively projects. According to NPV method cash flows are reinvested at internal rate instead of cost of capital therefore it does not provide adequate base for decision making.

Profitability Index

Advantage- This method uses time value of money or present value for the calculation of profitabilityindex. This method is more reliable in terms of decision making process where there are mutually exclusive projects.

Disadvantage- This method requires more calculation in terms of present value concept and it is not easy method to apply and use as decision making process(Jan 2012).

Explain which project (A or B) you would recommend for acceptance. Justify your answer.
MethodsProject AProject B
ARR91.11%50%
Payback Period1 year and 6 months2 years and 5 months
NPV45,86034,117
Profitability Index1.921.68

From the above table it can be observed that, in terms of ARR project A is more profitable as it has higher ARR i.e. more profitable in terms of net profit. On the other hand, Project A is more liquid i.e. initial investment will be recovered sooner as compared to project B. This can be measured from pay-back period of both the projects. Project A is more profitable on the basis of net present value of both the undertaken projects. There are11,743 net differencesin profit of both the projects that are to be analysed for decision making process. At last profitabilityindex is used for the decision making process in terms of profitability. If PI is more than 1 then there is profit in terms of present value and vice versa. Therefore, project A is having higher PI as compared to project B, project A shall be accepted.

Decision- Project A shall be accepted and project B shall be rejected.

Discuss the main financial statements any change to reporting requirements under International Financial Reporting Standards (IFRS)

Following are financial statements of that IFRS has issued for the companies to prepare during the financial year:

Balance sheet- It is the main financial statement that every company has to prepare during the reporting period. Balance sheet contains information related to financial position of the organisation i.e. it reflects the complete picture of organisation in terms of its financial strength and weakness. Balance sheet has four major components i.e. assets which further bifurcates into current assets and non-current assets, liabilities which further bifurcates into current liabilities and non-current liabilities and equity share holders fund or owners fund is the last section in the balance sheet. Balance sheet is largely used by investors, government and other regulatory bodies, banks & financial institutions, etc. for their decision making process.

Income Statement- Income statement has the capability of reflecting financial performance of the business organisation during the year. Income statement includes information relate to business operations undertaken by the organisation during the reporting period. Income statement includes information related to sales revenue, profit margins, direct cost incurred on business operations, expenses incurred on business administration, etc. Purpose of preparing income statement is to analyse earring capacity and for making analysis of expenses incurred on business operations and administrative(Chaban, Elgström and Holland 2010).

Cash Flow Statement- Cash flow statement is the financial statement which undertakes only cash transactions transacted during the year by the business organisation. Cash flow statement includes activities that require inflow and outflow of cash during the year. There are three major sections in cash flow statement i.e. cash from operating activities, cash from investing activities and cash from financing activities. Cash flow statement is prepared for the calculation of the closing cash balance during the year(Chaban, Elgström and Holland 2010).

Statement of Change in equity- Statement of change in equity is the statement which includes information related to equity shares and information related to change in owner’s capital. Statement of change in equity is the includes components like opening balance of equity share capital, equity shares issued during the year, bonus shares issued, retained earnings and information related to reserves and surplus belongs to owners of the organisation.Order Now

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