These rates of return methodologies are vital in terms of the measurement of financial performance, assessment of the risk and desirability of certain projects. Also the monitoring of a certain specific project performance. There are two vital rates of return concepts. The Economic rate of return and the Accounting rate of return. Both of these rates of returns play a vital role in terms of an investment appraisal .now, to measure the economic performance of an investment; we need to be aware of its Real rate of return of the finished project. Herein all Cash receipts are expressed in terms of monetary units which hold equal purchasing power. This theory is what provides base to the following value of a future performance. The present value of the expected cash flow of the project, discounted appropriately.
Differential analysis is considered an alternative to the traditional income statement format. Pricing decisions are made using the differential analysis methodology. If organizations apply differential analysis to pricing, then every price given for a product is considered as the alternative course of action. The fixed costs however will remain the same in between .The aim of all organizations in the process of selecting an appropriate price is where total future revenues will exceed total future costs.
DifDifferential analysis is done at various levels to assess, product pricing, project viability etc. All costs cannot be considered to be a part. The decision making only includes the future revenue. These future revenues tend to also differ .Management does not possess the capability of altering all of its past decisions. But on the other hand it is capable of changing its future decisions, by setting up its future costs with care.
Differential costs are also known, and often times referred to as or incremental costs. It is also comprehended as the difference in the total cost which occurs due to a change in Price .It is considered as the increase or the decrease in total cost. It is calculated mathematically, by subtracting the cost of one alternative from the cost of another alternative. This alternative choice can be arrived at by a change in method of production, in sales volume, change in product mix, make or buy decisions, take or refuse decisions etc.
Capital Investment Analysis:
All businesses need capital to keep operations running. Capital is required to finance investments in inventory, plant and machinery, accounts receivables etc. Financial managers also must decide how their companies should raise capital. Capital investment means, the amount that the owner can invest, in order to initiate the business. These are what he can provide for, from his personal resources, or any additional amounts. The owner of the business is the one, who is liable of all debts and liabilities to the business The Capital investment decisions are very crucial along with being complicated. They involve qualitative factors that are not easy to comprehend during the analysis. And so there are various calculating methods to analyze the capital investment of an individual business. A meaningful capital investment