Managing Financial Principles and Techniques Essay

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Pages: 9
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BTEC Level 7
Advanced Professional Diploma in Management Studies
Managing Financial Principles and Techniques

Prepared for:
McCain’s Board of Directors

By
Arslan Irshad Dar
Tooting and Broadway consults
12 June 2010

Table of Contents

Introduction....................................................................................................1
Merits of accounting rate of return..............................................................................................1.1
Demerits of accounting rate of return.........................................................................................1.2
Merits of Payback …show more content…
 It ignores the time-value of money which is an important factor in capital expenditure decisions. Profits occurring in different periods are valued equally.
 It considers only the rate of return and not the length of project lives.
 The method ignores the fact that profits can be reinvested.
 The method does not determine the fair rate of return on investment. It is left at the discretion of the management. So, use of arbitrary rate of return cause serious distortion in the selection of capital projects.
Merits of Payback Period
The pay-back method is widely accepted method for evaluating the various proposals.
 It is easy to calculate and simple to understand. It is an improvement over the criterion of urgency.
 It is preferred by executives who like snap answers for the selection of the proposal.

 It is useful where the firm is suffering from cash deficiency. The management may like to use pay-back method to emphasis those proposals which produce an early return of liquid funds. In other words, it stresses the liquidity objective.

 It is a handy device for evaluating investment proposals, where precision in estimates of profitability is not important.
Limitations of Pay-back Method
The pay-back approach suffers from the following limitations
 It completely ignores the
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