Applied management accounting - Essay Example

Furthermore, since its NPV of $20,149.83 is greater than the NPV of Machine 2 therefore we will give it a higher priority because of higher NPV. This equipment has a payback period of 3 years and 11 months therefore it lags behinds in terms of recovering the initial capital expenditure than Machine 2 or Machine 3. However, the payback period is not the ultimate criterion in accepting and rejecting projects therefore we will first look at this project’s NPV. This project has the highest NPV of $169,311.

58 therefore we will invest in this Machine as it has the power to add greatest value to the company. However, this is the most risky project as the larger cash flows will be generated during the long-term which are most of the time difficult to exactly predict due to uncertainty. The Net Present Value Method takes into account the time value of the money plus it also determines how much of the wealth will be added to the company’s net worth. Or we can say that it gives us an idea of the profitability of the project The payback period calculates how much time it would take the project to recover the capital expenditure invested in the project.

It is useful when the time horizon is short as it becomes vital to know how quickly the investment will be recovered. The payback period does not incorporate the time value of money. Another inherent flaw in this method is that it does not take into account the future cash flows which will be available after the initial expenditure has been