Universal Manufacturing Technology Limited’s CEO has decided to purchase a few machineries to improve the company’s operations. However, he is uncertain how to evaluate the machineries.
He has asked your advice on the various techniques to evaluate the investment. Discuss the several methods of investment appraisal techniques considering the methods using time value of money and not using time value of money.
Beside the above, the CEO is also keen to know about the following terms:
(a) Sunk Cost
(b) Relevant Cost
(c) Incremental Cost
(d) Opportunity Cost
In your discussion to the above terms, use appropriate examples.
One of the key areas of long-term decision-making that firms must tackle is that of investment the need to commit funds by purchasing land, buildings, machinery and so on, in anticipation of being able to earn an income greater than the funds committed. In order to handle these decisions, firms have to make an assessment of the size of the outflows and inflows of funds, the lifespan of the investment, the degree of risk attached and the cost of obtaining funds.
Even the projects that are unlikely to generate profits should be subjected to investment appraisal. This should help to identify the best way of achieving the project’s aims. For example, investment appraisal may help the CEO to find the cheapest way to purchase few machinery, even though such a project may be unlikely to earn profits for the company. Investment appraisal techniques are important tools in business decision making. The all suffer the fundamental problem of trying to compare the known with th...
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...osen. This $39,900 is the opportunity cost of the 150,000 units purchase order. Note that the $39,900, being a forgone cost rather than an outlay cost, would not ordinarily be recorded in the accounting system.
Managerial Accounting - JERRY J. WEYGANDT
- DONALD E. KIESO
- PAUL D. KIMMEL
Cost Accounting - CHARLES T. HORNGREN
- GEORGE FOSTER
Cost Accounting - ALAN UPCHURCH
(Principles and Practice)
Management Accounting - TIM DUNNINGHAM
- Http:// www.ac.boisestate .edu.com
- http:// economic.about.com
- http:// www.sbg.pdx.com
- http:// www.definethat.com
- http:// www.valuebasedmanagement.net
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