Investment Appraisal Methods Assignment Help
Investment appraisal methods are commonly divided into two broader categories: Analytical Methods and Economic Methods. The primary objective of the appraisal methods is to help the organisation in achieving a better decision with regards to the spending and investment process. Some of the appraisal methods that are used by the organisations for better understanding of their investments are being discussed herein below:
- NPV (Net Present Value): In this method of appraisal, the costs and the revenue for a particular project are predicted and estimated. The estimated amounts are then discounted and are observed in comparison to the initial investment that is to be made for the project. The projects that are preferable for the organisations are the ones, which have a positive NPV value. The projects, which have a negative value of NPV, should not be invested in, as according to the NPV method the present value of the benefits of the project is not enough to recover the initial investment in the project. In comparison with the other analytical methods of investment appraisal, NPV method is considered to be the most reliable method for making decisions about investments (Garrison and Noreen, 2007). When multiple analytical methods are being used for analysis, the results from the NPV methods are the most reliable options as compared to the other methods.
- Discount Rate: This is an analytical method, which is related to the NPV method of analysis. This method is used for the conversion of the benefits and the costs to the present value for reflecting the concepts of preference of time. The calculation of the rate of discount is based on various types of approaches such as the Opportunity cost of the capital, the social rate of the preference of time, method of Weighted Average, etc. The basic rate of discount is also known as the Test Discount Rate should be constant for all cost-effectiveness and cost-benefit analysis of the projects available in the public sector.
- IRR (Internal Rate of Return): The rate of discount, which when is applied to the net revenue of a particular project sets the value same as that of the initial investment on the project is known as the Internal Rate of Return. As per this method of appraisal any project that has an IRR greater than the specified return rate
The economic methods are used for the analysis for assessment of the desirability of the investment from the perspective of the society. This is different from any financial appraisal methods as in the financial appraisal methods; the assessment is done keeping the point of view of a stakeholder in mind. Some of the economic assessment methods are provided herein below:
- CEA (Cost Effectiveness Analysis): It is a difficult task to measure the value of the public investments in the society and the social infrastructure as the outputs cannot be accurately specified and quantified. In situations such as these, the cost of the various options is determined regarding money (Epstein and Lee, 2011). Eventually, an option can be chosen as per the preferences of the investors. CEA is not a tool that helps to decide whether a particular project is feasible or not.CEA is used for determining the lowest cost method for the determination of the objective of the capital project.
- CUA (Cost Utility Analysis): This method of economic appraisal is a variation of the CEA method. This type of appraisal technique is often used in the project appraisals for health care sector. In this process the costs involved in the project are expressed regarding money, whereas the outcomes of the project are expressed in the terms of their utility.
- CBA (Cost Benefit Analysis): The main objective of this method of economic appraisal technique is to make an assessment whether the economic and social benefits attached to the project are greater compared to the economic and social costs of the project. As per this method of appraisal of a project, a project is deemed viable when the benefits of the project exceed the costs associated with the project. In this method of analysis, the relevant advantages and costs related to the research project along with the indirect benefits and costs are also considered for analysis.
Two examples of calculations using different appraisal methods for projects have been depicted herein below:
|Investment Cost||Cash Income||Cash Outflow||Cash Flow|
Cost Accounting is considered to be the process of collection, analysis, summarization and evaluation of various options for an action plan. The primary objective of the process is to provide assistance to the management to take decisions based on the capability and efficient cost management of a particular option within the action plan (Drury, 2012). The method of Cost Accounting provides the management with the detailed information about the costs that shall help in management and control of the present operations of a business and also plan ahead for the future.
The following are the various approaches to cost accounting within a working environment:
- Standard Cost Accounting: It is the traditional method of cost accounting and was used an alternative to the earlier method of historical costs (Horngren, 2012). The method uses the ratios also known as efficiencies, which compares the materials and labour that is being used for the production of a good to the material and labour that would be required for the production of the same good under standard and ideal conditions
- Lean Accounting: The primary objective of the Lean Accounting system is to provide support for the various lean enterprises in the form of a business strategy for these organisations. The system aims to transform the traditional cost accounting system to systems that help to measure and motivate the usage of excellent business practice in the various lean organisations.
- Activity Based Costing: This method of costing is used for the identification of the various processes within an organisation and also assigning the various costs that are associated with the various processes along with the needed resources based on the real consumption of the processes. This method of costing is used for assigning more overhead costs in the direct costs as in comparison to the orthodox costing methods.
- Life Cycle Costing: This is a method of costing that is used for the assessment of the impact on the environment related to the various stages of the life-cycle of a particular product.
- Target Costing: This is a method of pricing, which is used by many organisations. It is often considered to be a tool for the management of cost and the reduction of the overall cost of a product over the product’s complete life-cycle. The method utilises the engineering, production and research and design concepts for achieving the reduction of costs (Horngren, 2008). This method helps the organisation to earn a set profit margin from a product from a specific selling price even if the cost of the production of the product is stated to be at its maximum limit.
Example of a Standard Costing Model is provided herein below:
|Particulars||Quantity per Set||Cost||Cost Per Set|
|Direct Materials||4.5 feet||$1.10||$4.95|
|Direct Labour||0.5 hour||$9 per hour||4.50|
|Manufacturing Overhead||0.5 hour||$1.30 per hour||0.65|
|Total Cost Per Unit||$10.10|
Mechanic wages @ £ 25000 per annum
Motor vehicle @ £ 18300 + an initial 10% deposit
Direct labour cost =£ 25000
Motor vehicle cost =18300 + 1830 = £ 20130
Annual overhead absorption rate = (total production overheads)/(direct labour cost)
Residual value of motor vehicle at the end of year 4
Let the Useful life 10 years, straight line depreciation rate = 1/10 = 10%
Depreciation = 10% of 18300 = £ 1830
|Year ended||Depreciation value||Carrying value|
|1st||1830||18300-1830 = 16470|
Residual value at the end of year 4 = £ 10980.
Calculation of total job costs
Total overhead cost = £ 350000
Mechanic wage per annum = £ 26000
Number of mechanics = 3
Suppose plant operate for 300 days, Mechanic wage per day = = £ 86.6
Suppose a mechanic work for 8 hours, mechanic wage per hour = = £ 10.825
Overhead absorption = x 100= £ 448
|Mechanic @ 5 hours labour||5 x 10.825 x 3 = 162. 375|
|Cost of service items|
Oil & filter, air filter, brake pads, brake cleaner
New head lamp and headlamp mounting bracket
New rear windscreen washer motor
|Environment waste disposal||5|
Total job cost = £ 1054
Office and workshop cost 125000 sqmeter @ £ 218750.
Calculation of overhead per sq meter
- 11000 sq meter
- 36000 sq metre
- 48000 sq meter
Overhead per sq meter = = £ 1.75
- 11000 x 1.75 =£ 19250
- 36000 x 1.75 = £63000
- 48000 x 1.75 = £ 84000
Let the service charge per vehicle = £ 80
Calculation for Number of services for an average profit of 78 per vehicle
If the number of vehicles for service = x
Profit = 78 x
Cost = 218750
Sales = 80 x
Profit = sales – cost
78 x= 80 x – 218750
80 x – 78 x = 218750
2 x = 218750
x = = 109375 units
Number of service for break-even point = y
80 y = 218750
y = = 2734 units
Sales revenue per quarter =£ 250000
Profit ratio = 43%
Profit ratio = (revenue-cost)/revenue
43/100 = (250000 – x)/(250000 )
(43x 250000)/100 = 250000 –x
107500 = 250000 – x
x = 250000 – 107500
x = 142500
Cost = 142500
Gross profit = revenue – cost of goods sold
Or = 43% of 250000 =£ 107500
Net profit = gross profit – operating expenses – tax
Operating Expenses = salaries + rent + utilities + depreciation + interest
Direct material: £ 53.35
20 lit ‘A’ = 0.80/ lt = 0.80 x 20 = 16
15 lit ‘B’ = 2.49/ lt = 2.49 x 15 = 37.35
Direct labour: £ 65
Preparation = 14 hours @3.75/ hr = 52.5
Assembly = 5 hours @ 2.50/ hr = 12.5
The budgeted total overheads for the year:
Budgeted overheads: 10.45
Preparation = = 4.2 per labour hour
Assembly = = 6.25 per labour hour
Fixed overheads = £ 25000 &£ 48000 respectively
Standard cost = direct labour + direct material + overheads
= 53.35 + 65 + 10.45 = £ 128.80
Standard cost should show sub-total for
- Basic cost = 25000 + 48000 = £ 73000
- Variable production cost = £ 128.80 per unit
- Total production cost if number of units produced is 1000 = Basic cost + variable cost
= 73000 + 128800 = £ 201800
The business concepts that shall be utilised for setting up of a new venture on the part of a major car dealership are as follows:
- Before starting the venture, there is a need for a proper business plan. The business plan shall set forth the aim and objectives of the venture. The plan shall also help in setting guidelines for its operation in the market for its success.
- The Business plan should clearly state the method of operation of the venture and as to what it aims to achieve from the market.
- The Business Plan should clearly state the services and products that it shall be offering to the potential customers and as to how these products and services are going to help the venture to grow in the market.
- The Business Plan should be used clearly stating the business objective of the venture and the financial statements along with it. The plan should consist of a financial assessment of the venture.
- The financial assessment of the venture should be done by utilising the various appraisal methods. The appraisal methods shall be used for identifying whether the venture on the part of the major car dealership is viable on not (Harrison and Horngren, 2011). If the venture is assessed to be not viable based on the conclusion of the appraisal methods, then suggestions shall be made for the improvement of the business plan.
Before the Business Plan is put it is imperative on the part of the venture to have a clear understanding of the market and the demographic location that it shall be operating in. For the better understanding of the various factors involved with the setting up of a new venture. The car dealership shall have to perform an environmental analysis of understanding the market in which it shall be conducting its business. A demographic analysis shall help the organisation to understand and recognise its potential customers in the market and their requirements and needs. A sensitivity analysis shall help the organisation to understand the impact of changing variables in the market on the operation of the venture.
Drury, C. (2012). Management and cost accounting. London: Chapman and Hall.
Epstein, M. and Lee, J. (2011). Advances in management accounting. Bingley, UK: Emerald. Order Now