summative presentation to what extend has investment assessment assisted a business to enhance its...

summative presentationTo what extend has investment assessment assisted a

business to enhance its wealth?

background• Business’s key purpose: enhance

owner’s wealth• Management accounting’s(MA) role:

help people make informed decisions inside the business

• Management accounting→a tool to assist a business→enhance its wealth

Investment assessment

• Most important area in MA

• Two main aspects in investment assessment:

1. Marginal analysis(Peter)

2. Capital investment(Tim)

• A case study in the real world(Daisy)

• plays a significant role in assisting a business to enhance its wealth

marginal analysis• Definition: concerns only variable cost and revenue

that vary with decisions

• It helps a business to enhance its wealth in four areas:

A. pricing and assessing contracts

B. efficient use of scarce resource

C. make-or-buy decisions

D. closing or continuation decisions

Capital Investment

- A crucial area for business.

The nature of investment decisions

• Essential feature: Time

• Definition: Investment involves making an outlay of something of economic value at one point in time, which is expected to yield economic benefits to the investor at some other point in time.

Why capital investment is important to a business?

• Large amounts of resources are often involved.

• Difficult or expensive to bail out of an investment.

The scale of investment by UK businesses

4 basic methods

• Accounting rate of return (ARR)

• Payback period (PP)

• Net present value (NPV)

• Internal rate of return (IRR)

Accounting rate of return

ARR = Average annual operating profit *100%

Average investment to earn profit

Problems:

Cannot competing investments of different size

Not directly relate to shareholders’ wealth

Ignores the timing of cashflows

Payback Period

• PP is the length of time when the initial investment to be repaid.

• Problems:– Not relate to shareholders’ wealth– Ignores inflows after the payback date– Ignores much relevant information

NPV & IRR

• NPV: the sum of the discounted values of the net cash flows from the investment.

• Features:• Considers all of the costs and benefits• Makes a logical allowance for the timing of those costs and benefits

• IRR: • Similar to NPV• Produce an NPV of precisely zero• Cannot usually be calculated directly

real life: Ryanair

assessing contracts

• fuel price dramatical increase scarce resource

efficient use of scarce resource

aircrafts types fuel usage revenue profits preference

real life: Ryanair

• aircrafts long term asset currency risks balance with demand MA assessment

real life: Ryanair

annual report:

upward trend in enhancing wealth

• http://corporate.ryanair.com/docs/corp/investor/2014/final_annual_report_2014.pdf (annual report)

• http://climateandstuff.blogspot.co.uk/2013/06/energy-costs.html (fuel price)