Evaluative Tools and Capital Investment - Essay Example

To ensure consistency within the organization, the general manager asks the accounting personnel to prepare a brief set of guidelines for all capital investment decisions. Guidelines for Capital Investment Decisions
I. Evaluate the Cost and Benefits of Long-Term Investments
Evaluating the cost and benefits of long-term investments takes time and money.

It also takes knowledgeable accountants and actuaries who can actually predict the financial success or failure of a project based on financial information. Therefore, it is of utmost importance that the accountant understands the real costs and opportunity costs of any investments before decisions are made about where to invest and when to invest. Of course, one always wants to make sure that one is on the right side of the market. If it is a bear market, one wants to sell short. If it’s a bull market, one wants to invest in financial exploits which will benefit the company financially.

II. Operating Assets Critical To Growth Plans
Operating assets that are going to be critical to growth plans must be managed
and utilized efficiently by the operations management team. That is why it is so important that one make sure one sticks to a consistent plan that will help one be able to analyze the various ways that projects might be carried out. For this, one needs a reliable team—and the accountant is a linchpin in helping an organization decide how to best proceed with the plans that they are ready to carry out. Of course, working with such a team is an important part of ensuring the project is a financial success.

III. Consistency in Evaluating the Financial Performance of Planned Projects
The importance of consistency in evaluating the performance of planned
projects are crucial. Everyone knows that good project management, therefore, makes certain that a budget is in place to deal with any problems that may come up. So, not only does the accountant want to provide the customer with adequate information about how well a projected project is going to succeed. It’s also of premier importance that there is some sort of consistency in the organization in terms of the financial organization so that it can weather difficult times, such as in a lagging economy.

IV. Evaluative Tools (NPV, IRR, MIRR, Payback, and Breakeven Analysis)
There are several methods available for analyzing cash flow. According to Fabozzi and Peterson (2003), “Cash flows are evaluated using NPV…IRR, MIRR, or a payback method” (pp. 442). As long as the MIRR is greater than the cost incurred by capital, any project should be accepted. Payback is the financial reward one will get for the investment. The longer the payback, the less likely it is that a project should be taken on or invested in by project managers or investors, respectively speaking. The breakeven analysis could be utilized in smaller projects where one can reasonably estimate if one is going to make a profit or not.

V. The Most Appropriate Methods For Projects of Various Sizes
Calculating NPV could be very efficient for smaller projects within the business in order to make sure that these projects are generating revenue. According to MacDonald (2010), “[W]hile NPV [(net present value)] calculates the value of the business or investment today, IRR [(internal rate of return)] calculates how fast the business or rate appreciates in value (its rate of return)” (pp. 308). The other methods, like IRR, MIRR, or the payback method are appropriate for projects that are on a grander scale. Read More