Acct 614 - Accounting Practices

ACCT 614

PH3DB

29th July 2015

In the business environment there are many decisions to be made.  Manager must then find ways and techniques that would allow them to properly analyze data in order to make well informed decisions.  For this particular scenario we must identify whether the investment opportunity is profitable for the company.  Such techniques that will need to be utilized are payback period, profitability index and net present value.  It is true to say though that each tools has its own perspective on then entire deal that we must decide on.

Management has understood that the capital limited therefore we must keep a close eye on the budget.  What we will use in order to make a determination in this situation is the net present value and the payback period.  Net present value is a calculation that compares the amount invested today to the present value of the future cash receipts from the investment. In other words, the amount invested is compared to the future cash amounts after they are discounted by a specified rate of return [(2014) What is NPV?, Available at: http://www.accountingcoach.com/ (Accessed: 29th August 2015).]  Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques [(2013) Payback Period, Available at: http://accountingexplained.com/ (Accessed: 29th August 2015).].

Companies seek to produce a cash flow that is positive. When a business chooses to invest money in a project such as an expansion, a strategic acquisition or just the purchase of a new piece of equipment, it may be years before that project begins to do this and time value of money becomes important for the organisation. Understanding and utilizing these tools would allow EEC to have what is needed to plan and implement a successful project.

References

What is NPV?, Available at: http://www.accountingcoach.com/ (Accessed: 29th August 2015).

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