Factors Should Be Considered While Making Investment Accounting Essay

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In this task we need to describe the two projects and compare them and make report of that two projects by applying our knowledge project public and private and how the appraise and by comparing them and in the second part need to write about post audit appraisal by recommendation.

Compared two Investment projects

Capital expenditure can be defined as expenditure where the benefits last more than 15 months.  For the most part, this means expenditure on assets such as buildings or equipment, which can be used over a long period.

Capital items are significant assets that will have a life of many years, such as land, new buildings, roads, etc. This is different to revenue spending, which covers day-to-day items to run services such as staffing and purchase of services. Capital items need to be funded separately to reflect this difference in use.

Revenue expenditure is expenditure incurred either for the purpose of trade of business i.e., selling and distribution expenses. It is used for maintaining existing earning capacity of non-current assets.

Considering two investment projects below:

Profit / Loss

Project A

Project B

Capital Expenditure

(60000)

(60000)

Year 1

10000

25000

Year 2

35000

15000

Year 3

15000

10000

Year 4

(9000)

10000

Year 5

(10000)

(9000)

Each project is expected to be operational for five years and at the end of which time there is not expected to be any scrap value.

Capital expenditure for both projects would be incurred immediately.

Depreciation to be charged on straight line basis method.

Tax to be ignored.

Cost of capital to be 15%.

Project-A

Capital Expenditure is 60000.

At the end of five years value becomes zero.

Year

Cost in Percentage 15%

Discount Factor

1

1 / 1 + 0.15

0.894

2

0.894 / 1 + 0.15

0.797

3

0.797 / 1 + 0.15

0.712

4

0.712 / 1 + 0.15

0.637

5

0.637 / 1 + 0.15

0.567

Year

Profit/Loss

Discount Factor

Present - Value

0

(80000)

-

-

1

26000

0.894

23244 (26000*0.894)

2

51000

0.797

40647(51000*0.797)

3

31000

0.712

22072(31000*0.712)

4

7000

0.637

4459(7000*0.637)

5

N.P.V

6000

-------------

0.567

---------------------

3402(6000*0.567)

33824(93824-60000)

At the end of five years, project would give £33824 (93824 - 60000)

Project-B

Capital Expenditure is 60000.

At the end of five years value becomes zero.

Depreciation = 12000 (60000/5).

Profit is increased by 12000, profit becomes 37000 (25000+12000).

Calculating pay-back period of project and Net present value

Calculating net present value

Interest rate = 15%

Depreciation = 12000 (60000/5).

Profit is increased by 12000, profit becomes 22000 (10000+12000)

Calculating pay-back period of project and Net present value

Calculating net present value

Interest rate = 15%

Year

Profit / Loss

Discount Factor

Present - Value

0

(60000)

-

-

1

37000

0.894

33078 (37000 * 0.894)

2

31000

0.797

24707(31000*0.797)

3

22000

0.712

15664(22000*0.712)

4

26000

0.637

16536(26000*0.637)

5

N.P.V

5000

-----------------

0.567

----------------------

2835(5000*0.567)

32820(92820-60000)

At the end of five years, project would give £ 32820(92820- 60000)

As identifying both projects A and B, I would suggest to invest in project A there is more income as compared to project B and payback period is also early as compared to project B.

Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyse the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. For example, if a retail stores business wants to purchase an existing store, it would first estimate the future cash flows that store would generate, and then discount those cash flows into one lump-sum present value amount, say 565,000Pounds. If the owner of the store was willing to sell his business for less than 565,000Pounds, the purchasing company would likely accept the offer as it presents a positive NPV investment. Conversely, if the owner would not sell for less than 565,000Pounds, the purchaser would not buy the store, as the investment would present a negative NPV at that time and would, therefore, reduce the overall value of the Retail Store.

Discount Payback Period

The payback method determines the length of time it takes to recover an initial investment. This amount of time is called the payback period. A particular amount of time is selected as a cut-off payback period for the project to payback the initial investment. The easiest way to think of the payback period is the length of time it takes to break even in an accounting sense.

ADVANTAGES

Adjust uncertainly of later cash back.

DISADVANTAGES

Ignores time value for money and doesn't count cash flow.

Must choose an arbitrary cut off point.

Biased against long-term projects.

Company do some comparison between different projects and try to find out most effective and profitable project for the company, but Private Company make investment considering different factors then public company.

Following factors should be considered while making investment :

Weight of time-value of money

Payback period

Interest rate

Company do some comparison between different projects and try to find out most effective and profitable project for the company, but Private Company make investment considering different factors then public company.

Public sector:

In public sector, company cannot even rely on the financial information like rate of return and payback period etc, there are so many other issues needed to be considered while making decision on choosing or rejecting any project. It involves the delivery of goods and services by and for the government national, regional local or municipal. (e.g. Companies house, HM Revenue & Hospitals etc)

Other Factors need to be taken into account:

Health and Safety (e.g. HM Revenue, Companies House)

Geographical Location

Government Polices and Properties

Rate of Taxation

Task 2.2 & 2.3

Post Audit Appraisal and Recommendation

A set of processes to evaluating capital budgeting decision after the companies achieved facts and figures. It is the work to give an opinion as to whether the financial statements show a true and fair values and views of the results at the end of selected financial year. To do post-audit of any organisation, more information about the company will provide more clear picture and idea about to make post-audit.

Balance Sheet

It Provide detailed information about the business assets and liabilities also the liquidity of the business.

Profit and loss account

It How profit or loss gathered by organisation

Cash flow statement

Shows all cash inflows and out flows of the business during the particular time period

Stakeholders, employees, suppliers, Inland Revenue - provide in depth knowledge about the business

Trading figures

Sales and purchases helps to find profit amount both financial and non-financially (i.e. customer satisfaction)

Cost information of the production and products

Capital Budgeting of the organisation will give the information about the future projects and funds (expected).

A post audit of an investment decision should include an assessment of the decision-making process, and the results, benefits, and outcomes of the decision. It facilitates organizational learning and support continuous improvement in the investment and implementation process. It assesses, after the fact, the efficiency and effectiveness of an investment appraisal, and management's decision and implementation.

It should also include a review of assumptions made during the decision-making process, for example assumptions on markets, technology, competition, cost of capital, etc. Post audit monitors and evaluates the progress of capital investment through comparing actual cash flows and other costs and benefits with those originally projected. Where a review cannot measure all cash flows generated by an investment project (for example where it is not possible to split the impact of a project from the remainder of an organization), relative success should be judged on a wider set of business processes or program.

In order to decide, which project is beneficial for the company, need to evaluate and analyse the projects on the available data regarding the capital expenditure and profits, the Net Present Value, Pay-back period and Internal rate of Return etc.

Performance Mentoring

Cost Benefit Analysis

Risk factor

Other factors such as technical or inflation.

All these finance information makes easy to do post-audit. It is not only depends up on financial information but also needs to get other non-financial information that will also give well help to do the post-audit. More and precise data, accounts will help needed in process.

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