Financial and Managerial Accounting for Decision Making

Name
Course
Institution
Professor
Date
COVER LETTER
PEVENSEY PLC
MARY FULT0N
THE COMPANY SECRETARY
Dear Mary
The major objective of this structure business report is to appraise the various machines give and in the process recommend the best machine to be purchased by the company.
The major objective of this report is to use the discounting and non-discounting techniques in the process of finding out which of the four machines given should actually be bought.
I hope the Board of Management and other decision makers will find this carefully prepared report to be of great use.
Regards
XYZ
Abbreviations
PVpresent value
ROIReturns on Invetsment
INTRODUCTION
The Board of Management had commissioned the company secretary Mary Furton to prepare a structured business report that accurately employs the appraisal tools to help the company directors in making their decisions on the type of machine to be bought.
In the appendices, I have included an exhaustive record of all the necessary calculations to aid you in understanding of this particular report. The terms used have been well defined to make even someone who has never been to an Accounting class to fully understand the contents therein.
There are very many methods that are employed in appraisal of prospective investments. Generally, the methods can be classified into two:
1 The Non-discounted cash flow technique. This method includes the use of Payback and Average return on book value
2 Discounted cash flow technique. The discounted technique involves the use of Net Present Value and IRR. The Discounted cash flow focus on the opportunity cost of the corporation money.
When making a decision to invest, all the machines that have a present value greater than zero are accepted and those that have NPV<0 should always be rejected.
Internal Rate of Return (IRR) is the return that is equal to the initial investment with present value of cash flows.
It should always be understood that the projects with IRR> r should be accepted. On the other hand, Projects with IRRPAY BACK PERIOD (PBP)
This is the period of time required for the cumulative expected cash flows from an investment project like the one our consideration.
PBP Strengths and Weaknesses
The Strengths
* Easy to understand
* Can be used to measure liquidity
Weaknesses
* Cut-off period is subjective
* Does not consider cash flows beyond the Pay Back Period(PBP)
Internal Rate of Return (IRR)
Strengths
* Less subjectivity
* Considers all cash flows
Weaknesses
* Assumes that all cash flows are reinvested at the IRR
* Difficulties with project ranking
PROJECT JUSTIFICATION
The world is ever becoming complex each and every day. There are a myriad of factors needed to be taken into account before making any decision in the world of business today. New techniques of project appraisal h...