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Advanced management accounting - Assignment Example

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Advanced management accounting

The net present value method is usually used to calculate the economic viability of a project and it is used to determine if the project is economically viable or it is not. The advantage of using the NPV criteria in the valuation of a project is the fact that the method has a clear decision making process. In evaluating a project or product, if the net present value is positive, then the project should be accepted by the management because the product or project would benefit the company (Cadenhead, 1970, 80).If the net present value is a negative, then the project or product should be rejected. If the net present value is equal t zero, then the management would be at a break even and any decision taken would not be harmful to the profitability of the company (Barton, 1999, 234). In case the management of Smart electronics decides to talk up the proposed investment, it would be costly for the company because the company would be running at a loss as a result of the many costs that are associated with the product. The only thing that would warrant the acceptance of the product would be the reduction of costs to the company. The many costs that are associated with the product are making it hard for the company to gain any profits (Bastable, 1995, 133). C) Return on investment is a rate of return that accrues to shareholders of a company as a result of investing in the company. The rate of investment would be the main determinant for an investor before making any decision. The rate of return is however determined by the risk factor that is associated with a project or company. A company that has a high rate of risk is usually associated with high returns while companies that have low risk levels are associated with low returns. In the case of Smart electronics, the return on investment will be viewed on the rate of return that will accrue to the company as a result of investing in the new product. The investment in a new product should be feasible in the sense that the returns should be positive and that the returns would be in such a manner as to work in the favor of the company in terms of profitability. Profitability of a company will increase if the company gets high returns from the products that it sells. For smart electronic to maximize on its rate of return, it should try to cut on costs that are associated with a product and the level of efficiency should be improved so as to ensure that running costs are as low as possible. The level of efficiency is usually determined by the machinery that is in the company. That should be done in a manner that the process of a company are efficient and the people working in the various departments are also efficient enough. Efficiency of processes is done by the company improving on the machinery that is been used in a company and the company improving the level of technology that is required to make the production process easier and simpler (Anthony, 1997, 225). The efficiency can ...Show more

Summary

Smart electronics Date Year 1 Year 2 Year 3 Year 4-11 Year 12 sales 70*6000= 420000 12000*70= 840000 15000*70= 1050000 18000*70= 1260000 18000*70= 1260000 Less variable costs 6000*30= (180000) 12000*30= (360000) 15000*30= (450000) 18000*30= (540000) 18000*30= (540000) Fixed costs (270000) (270000) (270000) (270000) (270000) Advertising costs (360000) (360000) (300000) (240000) (240000) Salvage value 30000 Cash inflows (390000) (150000) 30000 210000 240000 b) NPV NPV= discounted cash inflows- cash outflow Discounting rate @14% cash flow Discounted cash flow 1 0.8772 (390000) -342108 2 0.7695 (150000) -115425 3 0.6749 30000 20247 4 0.5921 210000 124341 5 0.5193 210000 109053 6 0.455…
Author : wconroy
Advanced management accounting essay example
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