Study Principles of Accounts notes on Capital Investment Appraisal. Useful for revision, homework, and exam preparation in Zimbabwe.
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This is the Principles of Accounts notes. It is a free notes for revision.
C
APITAL INVESTMENT APPRAISAL[MR KAYBEE]
INVESTMENT APPRAISAL involves a series of techniques, which enables a business to financially appraise investment projects.
- It can be used to compare different projects to determine which is more favourable.
- main methods used to evaluate investment in capital projects are:
- Accounting Rate of Return.
- PayBack Period.
- Net Present Value.
- Internal Rate of Return.
Accounting Rate of Return (ARR)
- Is a method of capital investment appraisal which uses the accounting profits or earnings of an investment over the life of the investment and measure it against the cost of the investment to get the return on the investment.
- It is calculated as follows:
\[
\begin{aligned}
A R R= | \xrightarrow{\text { Average Profit }} \times \underline{100} | \text { Average Investment }
\end{aligned}
\]
\[
\text { Average Investment }=\text { Initial cost }+ \text { Scrape value }+ \text { Additional Working Capital }
\]
\[
2
\]
Advantages of Accounting Rate of Return Method (ARR)
- It is simple and easy to calculate.
- Takes into account all the savings over the entire period of investment.
- Is based on accounting profit rather than cash inflow. Accounting profits can be easily obtained from financial statements.
- Measures the benefit in percentage which makes it easier to compare with other projects.
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