Submitted by: Submitted by avnsam
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Words: 2535
Pages: 11
Category: Business and Industry
Date Submitted: 04/03/2011 01:59 AM
Question 1:
Accountants make a distinction between Capital Expenditure and Revenue expenditure
(Dyson, 2007). Dyson further says capital expenditure provides benefit to an entity for more
than one year, while revenue expenditure does so for one year. Drury (2005) refers to
expenditures of a capital nature as Capital Investments describing them in the same manner
as Dyson. Collin (2007) defines investment appraisal as an analysis of the future probability
of capital purchases as an aid to good management. In this essay, we are going to discuss
investment appraisal, supporting the argument that investment appraisal should add value to
the organisation. We are also going to analyse critically, the NPV and IRR methods as the
two main discounted cash flow techniques of investment appraisal available to management.
Drury explains that capital investment decisions are applicable to all sectors of the society
and gives examples of such decisions in business firms (including investments in plant and
machinery, research and development, advertising and warehouse facilities) and the public
sector (including new roads, schools, and airports). He also highlights the importance of such
decisions, stating that they represent the most important decisions that an organisation
makes, since they commit a substantial portion of the firm's resources into actions that are
likely to be irreversible.
Barfield et al (2004) define clearly, an Investment Decision, stating that it is a judgement
about which assets to acquire, to achieve an entity's stated objectives. This clearly identifies
an important characteristic of investments decisions made during investment appraisal, being
that, they must be aligned with the company's stated objectives and should therefore
contribute towards the achievement of the set objectives – thereby adding value to the
organisation. In other words, selected investments should be value adding.
The idea of value creation is to capitalise on...