Understanding management accounting and financial management Assignment

Understanding management accounting and financial management - Assignment ExampleFor this expansion setting up new plant is essential for leakage laid- pricker ventures plc to increase the capacity. The inception of new plant will require sign outlay of ?4m. on with this, research and development department is taking another throw of product development with two options A and B. In this report these two options are evaluated apply different techniques. Two projects A and B most(prenominal) are mutually exclusive need to decide which project is more suitable for the Flight high ventures plc. Both the projects have initial capital of the United States investment which is shown in annexure as negative. Project B has initial investment of ?1210000 and project A has lower initial investment of ?968000. Lower initial investment does not signify that it is better to accept or reject because there is difference in economy of weighing machine in those projects. Hence the effect is reflected in loot earning and in hard currency flows per year. These two projects are evaluated using four different techniques like payback method, accounting regulate of return method (ARR), net designate value (NPV) and internal rate of return (IRR) (Collier, 2003, 185-193). Payback for the project A is 2.5 years and for project B is 3.5 years. Hence project A needs 4.5 years to get repaid by its m peerlessy flow and project B needs 3.5 years. This pay back period depends on the amount of investment and size of cash inflow. If the project has higher cash inflow at the initial time of the tenure of the project thus it will effect on the payback time to be lessened. This notion is an advantage to pay back process as the risk of payment through early payment is reduced in this process. some other few advantages are like easy to calculate, simple concept and consideration of cash not profit only. But this procedure of evaluation has major flaw of non consideration of time val ue of money. Payback concept does not consider the cash inflow out of the stipulated time which may be for infinite for some projects. Hence the project size and the time are not under consideration of this method. (Kay, 2011, p.108) Accounting rate of return of any project is based on the average accounting profit and average capital investment. Here profit is considered in the unhurriedness instead of the cash flow. Profit is counted after excluding depreciation from the cash flow. This ARR calculation has similarity with other calculation for return on investment (ROI) and return on rightfulness (ROE). Only dissimilarity is in denominator. In ARR the main benefit than payback is the consideration of the project vivification span. Simple in calculation of ARR is another advantage. The result of ARR can help to compare more than one project and also with other financial ratios. But main advantage is similar to payback is, not of considering the time value. Other disadvantages a re like not considering the scale of the project and timing (Atrill and McLaney, 2006, p.329- 332). (Damodaran, 2002) In those higher up two methods risk is considered in the calculation but inflation and interest foregone factor is not considered. In the NPV and IRR method time value of money is applied in the calculation. In NPV calculation the unquestioning size of the project is accounted and also in the discounting factor consideration of calculation of the discounting rate is important (McGrath, 1998). ordinarily cost of capital is considered in this calculation but this is the main advantage of NPV method, because of the hardness in calculation of cost of capital (Brigham, Enrhardt, 2010, 383). IRR is positive for the projects with unknown discount rate but known cash flows. identical NPV, IRR also considers risk and time value of money. But IRR ignores the change in discount rate and also the gives multiple result for the cash flow with combination of inflow and out flow .