Invesment

WHICH ONE IS THE BEST PROJECT?

QUESTION 1:

WHAT IS INVESTMENT?

Investments either short or long term placements represent the company implements to earn a return on them or to receive dividends that help increase the capital of the company. According to (Angelico G, Ehsan N, 2000), the short-term investments if you want postings which are practically effective at any time unlike thelong term representing a little more risk in the market. Although the price of a bond market can fluctuate from day to day, you can be sure that when the deadline arrives, the market price will equal the bond's maturity value. The shares, on the other hand, have no maturity value. When the market price of a low action, no way to tell whether some reduction is temporary or permanent. For this reasondifferent valuation rules apply for accounting for investments in marketable debt securities (bonds) and property marketable securities (shares). When bonds are issued at a discount, the value of maturity of the bonds exceed the value originally paid. Therefore, the discount can be considered can be considered an interest charge included in the maturity value of bonds. The amortization of thisdiscount over the life of the bond issue increases the regular interest expense.

WHAT IS INVESTMENT APPRAISAL?

According to (Eugene B, Philip D, 2010) when there are several alternative investment projects is chosen who has the highest NPV, provided they are projects involving similar investments, because if the amount of the investments were very different, the NPV is little operationalcriterion since it does not measure the profitability for each dollar invested.

METHOD CASH FLOW

According to (Mian A, 2002) this method provides dynamic information of the company and is an accounting tool that reflects the flow of internally generated funds, derived from a ratio of inflows and outflows of money (income and expenses payable) and provides a measure of self-financing.

EconomicCash Flow = Net Income + Expenses undisbursed

Note: The non-payments are: amortization of intangible assets, depreciation of tangible fixed assets, provision for bad debt, amortization of deferred expenses, etc..

ACCOUNTING RATE OF RETURN

The Method of Accounting Rate of Return (TRC) is to compare the accounting profit with investment value, choosing this project, as TRC is greater.The TRC is obtained as the average after-tax profit split between the initial investment amount as stated in the following expression.

PAY BACK

It is a simple method, especially for small enterprises, which is based on determining the period of cost recovery of investments and select among mutually exclusive projects one whose initial recovery period is shortened and the decision to invest ornot taken by comparing the recovery period the amount of investment of the project with a predetermined standard. (Friedrich-W Manfred D, Markus W, 2007).

CALCULATING DISCOUNTED CASH FLOW

NET PRESENT VALUE:

The Net Present Value (NPV) is the most popular method for assessing investment projects over time. Net Present Value to determine whether an investment complies with the basicobjective financial: maximize investment. Net Present Value to determine if the investment can increase or decrease the value of the organization. This change in the estimated value may be positive, negative or remain the same. If positive means that the value of the firm will have an increase equivalent to the amount of Net Present Value. If it is negative means that the firm will reduce its wealth inthe value yielding the NPV. If the result is zero NPV, the firm will not change the amount of its value.

Net Cash Flow Discount Factor Discount (real) cash flow
YEAR one £10.000 0.952 £9.520
YEAR two £10.000 0.907 £9.070
YEAR three £10.000 0.864 £8.640
YEAR four £10.000 0.823 £8.230
YEAR five £10.000 0.784 £7.840

It is important to note that the value of Net Present Value depends on...