ACC202 Assignments Week 5 - Discussion 2

Part 1: Rank the four projects in order of preference by using the following table:

(a)

Net Present Value

(b)

Profitability Index

(c)

Internal Rate of Return

(d)

Payback Period

(e)

Average Rate of Return

1st preferred

C

A

B

C

D

2nd preferred

B

C

A

A

A

3rd preferred

A

B

C

D

B

4th preferred

D

D

D

B

C

Part 2: Write a response in an initial post of at least 200 words discussing the usefulness of capital investment techniques (net present value, profitability index, internal rate of return, payback period, and average rate of return) in selecting the four alternative investment opportunities in part 1

Organizations generally have limited capital and/or access limited debt. They incur a cost expense to access all capital and are expected to provide value for those capital items. Which is more; there is the time-value of money and capital inflation risks, which the organization has to consider in coming up with its capital budgetary needs. Capital is in turn used to fund both capital investments and necessary operations of the organization as deemed fit. Proper planning for capital usage is required in order to make appropriate decisions that balance the expectations of the capital providers with the capital requirements.

Capital Investment techniques are used to determine which is the best alternative decision to be made in line with the objective and values of the organization. Organizations will have different capital requirements as it develops. The different appraisal techniques will look at different aspects of the project. For example, payback period looks into how long it takes the organization to recoup capital investment while net present value considers what is the profitability of the project.

According to Sangster (1990), organizations have to use of more than one criterion for cautionary measures. The more methods used in the appraisal process, the better, because the possibility of an inappropriate decision being taken is reduced as the number of checks implemented is increased. As such, they tend to have a primary method which will often be the first technique whose results are consulted, leading to preliminary acceptance/rejection or will be the final technique considered to make the decision when other methods are used before or with it. He also understates that, information availability and technological development have made smaller organizations capable of using a selection of capital investments appraisal techniques for decision making.

Sangster, Alan. “Capital Investment Appraisal Techniques: A Survey Of Current Usage.” Journal of Business Finance & Accounting, vol. 20, no. 3, 1993, pp. 307–332., doi:10.1111/j.1468-5957.1993.tb00258.x.