Blacksacademy
Business Studies
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Subject: Accounting and Finance
Title : Investment Appraisal - Payback Method
Investment AppraisalThe purpose of investment appraisal is to determine which of a number of investment opportunities is the best. Generally investment involves the commitment of capital which will only make a return at a later date. There are different methods of investment appraisal which emphasise different criteria by which the decision is to be made.
1. The payback method emphasises quick return, but could be biased against long-term projects that are more profitable.
2. The accounting rate of return looks at cash flow over the lifetime of the project and calculates an average rate of return. It takes into account long term profit but ignores the time-value of money.
3. Net present value incorporates the time value of money by use of discount tables.
4. Internal rate of return is a more sophisticated application of net present value.
All of these methods involve making predictions about future cash flows arising from the investment and inevitably involve subjective judgments regarding the future.
Payback Method
The payback method finds the period of time it takes for the investment to be covered by the return. We learn the payback method by means of worked examples.
Exericses in the Payback Method
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Subject: Accounting and Finance
Title : Budgetting and Variance Analysis
BudgetsA budget is a term for any projection and plan regarding the future of the company.
To “budget for” means to plan for the future, to set constraints and to predict.
Expenditure is the most obvious thing to budget for, especially since every company must be careful with costs. However, sales can also be budgeted for and production.
So budgets are
- prepared and agreed in advance
- cover a specific time period
- are expressed in either financial terms or real terms (that is, as physical quantities)
- relate either to the firm as a whole or to a part of it.
Variance Analysis Actual results may differ from the budgetary predictions. When the actual result differs in a way that is favourable, this is called a positive or favourable variance, and when the difference is unfavourable, this is called a negative or adverse variance.
A variance is a deviation from an expected, budgeted value.
The aim of variance analysis is to analyse in detail those elements of cost that are causing an overall deviation from expected performance.
Some factors that may result in variances are
1 Use of materials
2. Prices of materials
3. Efficiency of labour
4. Wages
5. Use of overheads
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