MBA Accounting

Further to my earlier article on Accounting Rate of Return, let’s look at another simple investment appraisal method called Payback Period.This method seeks to determine how long it takes for the investment project to pay back its initial capital cost. (more…)

We have reviewed the four methods of investment appraisal techniques:

• Payback
• Accounting rate of return
• Net Present Value
• Internal Rate of Return (more…)

The profitability index is an alternative way of stating the net present value (NPV). It takes the present value of the cash-flows and divides them by the initial capital outlay.
i.e.: Profitability Index (PI) =Present value of cash flows / Initial cash outflow

Interpretation:
If the PI is more than one, then we should invest in the project as it represents a positive net present value. (more…)

In basic term, net present value (NPV) of an investment is the difference between:
The present value of future cash flows and the present value of the initial capital expenditure required to implement the project. (more…)

In the earlier articles, we have looked at how we compute NPV and IRR and also understand how to interpret the individual result.
One very good point is that both NPV and IRR are able to eliminate the greatest disadvantage of ignoring the time value of money or present value unlike the other two methods -Payback and ARR.

We now focus on the advantages of using IRR: (more…)

In the previous article on NPV, we noted that a positive NPV denotes that a project can be accepted as it generates excess returns over its cost of finance. Hence, vice-versa, we cannot accept a negative NPV as it cannot generate a return above the cost of finance.
How do we then interpret a zero NPV (more…)

There are many investment appraisal techniques.

Today’s article is confined to the discussion of the Accounting Rate of Return Method or Accounting Return on Book Value. First, we shall go thro’ an illustration to demonstrate how it’s being calculated and then go on with the discussion on its advantages and disadvantages. (more…)