Further Investment Appraisal T

IMA Advanced Management Accounting,CIMA考试管理级等级中高级管理会计，同时也适用于自己对于管理会计内容的自学

Further Investment Appraisal Techniques

• internal rate of return
  • definition:IRR calculation provides the discount rate at which the net present value of all cash flows from a project is zero
  • calculation
    • • 步骤
        • calculate the NPV at a cost of capital we choose
        • calculate the second NPV use a different cost of capital,if the first NPV is positive, choose a bigger COC, otherwise , choose a smaller one
        • use the formula to calculate
        • 注意前面还有一种IRR的计算方法
  • Advantage of IRR
  • Disdavantage of IRR
    • as it's a % measure, it's not suitable for choosing between projects of different size
  • 抉择：如果在做决定时，NPV和IRR的结果产生冲突，优先考虑NPV的结果
• Modified IRR based on terminal value
  • calculation
    • 1. First, we need to calculate the interest rate modifier for each year.
    • 2. We then use the interest rate modifiers and multiply them by our cash flows
    • 3. Now add up the inflated cash flows. This will give us the ‘forecast inflow’
    • 4. Our forecast inflow is then divided by our initial investment. This shows us our total return on investment.
    • 5. Finally, we need to calculate how much interest we earned per year to get to this total return.
      • 根据年限开根号
  • 对比
    • only NPV can be used to distinguish between two different independent projects，This means that NPV is the better technique for comparing two different projects.By comparison, the IRR only says how far the cost of capital could increase before the project would not be worth accepting. It's worth noting that the MIRR solves many of the main problems associated with IRR!
• Payback Period
  • This is the length of time it will take for an investment to be paid back.
    • the longer the payback period, the greater risk
    • easy to understand as the outcome is represented in years and months
    • it's a basic technique for appraising investment, but ignores many factors that other techniques have
    • payback period=cost of capital/annual cash flows
    • problems with payback period
      • does not cover cash flow after the payback period
      • does not account for the time value of money
        • discounted method
    • discounted payback method/ adjusted payback
• Return on Capital Employeed
  • return on capital employed compares profit with capital, it gives a view on how well capital is being used by telling us how much profit a company has made relative to its investment
  • calculation:
• Accounting Rate of Return/ARR
  • ARR is a more easy method of calculating return, but because its simplicity, it also has some shorts, it doesn't take into account the time value of money and other factors such as tax and inlfation
• Comparison of appraisal techniques