1. Paper F2 Management Accounting
2019/4/4

2. Chapter 19 Methods of project appraisal
2019/4/4

3. Methods of project appraisal
Chapter Preview
Methods of project appraisal
Key methods
Time value
of money
(Discounted) payback period
Present value VS Future value
NPV
Discounting VS Compound interest
IRR
Relevant cost
2019/4/4
Ji Weili, JXUFE

4. Why? How? Project appraisal
-- to decide which are worthwhile, whether or not to make an investment.
How?
--Identify and calculate relevant cash flows for investment projects.
-- Apply an investment appraisal method.
2019/4/4
Ji Weili, JXUFE

5. Appraisal methods Non-discounted cash flow techniques-- payback period
Discounted cash flow (DCF) techniques-- discounted payback period, net present value(NPV), internal rate of return(IRR)
2019/4/4
Ji Weili, JXUFE

6. Payback period
--the time taken for the initial investment to be recovered in the cash from the project.
Example: p.418 question
used in the situation if there are liquidity problem, or if distant forecasts are very uncertain.
2019/4/4
Ji Weili, JXUFE

7. The time value of money Futuer value (FV) & Compound interest终值和复利
FV=PV(1+r)n
r--利率 n--计息期数
Present value (PV) & Discounting 现值和贴现（折现）
PV=FV/(1+r)n
r--贴现率 n--贴现期数
2019/4/4
Ji Weili, JXUFE

8. The time value of money
Discount rate 贴现率--经常使用资金（本）成本率(cost of capital)
Discount factor/Present value factor 现值系数
Present Value Table 现值系数表
Annuities 年金 --an annual cash payment or receipt which is the same amount every year for a number of years.
Annuity-- the sum of the present value factor
Annuity Table 年金现值系数表
2019/4/4
Ji Weili, JXUFE

9. Discounted cash flow techniques
Discounted payback period 贴现的投资回收期
Net present value(NPV) 净现值
Internal rate of return(IRR) 内含报酬率
2019/4/4
Ji Weili, JXUFE

10. Calculation--PV of future benifits minus PV of future costs.
Decison rule:
NPV>0, accept
NPV<0, reject
Calculation--PV of future benifits minus PV of future costs.
Example: P
2019/4/4
Ji Weili, JXUFE

11. IRR>cost of capital, accept IRR<cost of capital, reject
Decison rule:
IRR>cost of capital, accept
IRR<cost of capital, reject
Calculation--the discount rate which produces the NPV of zero.
Example: P
2019/4/4
Ji Weili, JXUFE

12. Identify relevant and non-relevant costs
Relevant costs should be used for decision making, arising as a direct consequence of a decision.
Non-relevant costs are irrelevant for decision making, should not be taken account of in decision making .
2019/4/4
Ji Weili, JXUFE

13. Relevant Costs FUTURE FUTURE FUTURE INCREMENTAL INCREMENTAL
What is a relevant cost?
FUTURE
FUTURE
FUTURE
INCREMENTAL
INCREMENTAL
INCREMENTAL
CASHFLOW
Only future costs are affected by our decision
Only future costs are affected by our decision
Only future costs are affected by our decision
i.e. incurred as a direct result of our decision
i.e. incurred as a direct result of our decision
i.e. incurred as a direct result of our decision
Only cash
Only cash
Also use this slide to run through the things which are NOT relevant costs eg sunk, historic, book values, committed costs, contracted costs etc.
2019/4/4
Ji Weili, JXUFE

14. Example e.g. need 500kg of material for new project
have 300kg in stock (cost $3/kg)
current purchase price = $5/kg
scrap value = $1/kg
what’s the relevant cost of the 500kg?
IRRELEVANT
Not in notes so go through slowly
2019/4/4
Ji Weili, JXUFE

15. Important concept: Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.
Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000.
2019/4/4
Ji Weili, JXUFE

16. Differental or incremental costs
'Differental costs' is used to compare the differences in cost between two options.
'Incremental costs' is used to state the relevant costs when two or more options are compared.
2019/4/4
Ji Weili, JXUFE

17. Non-relevant costs: Sunk Costs
All costs incurred in the past that cannot be changed by any decision made now or in the future.
Sunk costs should not be considered in decisions.
Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.
2019/4/4
Ji Weili, JXUFE

18. Non-relevant costs: Committed Costs
--A future cash outflow that will be incurred anyway.
--Committed costs may exist because of contracts already enter into by the organization.
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19. Non-relevant costs: Notional Costs
--A hypothetical accounting cost to reflect the use of a benefit.
--no cash expense is incurred.
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20. Avoidable VS Unavoidable costs
Other Concepts
Avoidable VS Unavoidable costs
Attributable Fixed Costs VS General Fixed Costs 1 2
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21. We’ve Conquered Time Value of Money!
2019/4/4
Ji Weili, JXUFE