Case Study 02242 Essay Example | Topics and Well Written Essays - 2500 words

Case Study 02242 - Essay Example The project with the highest cumulative of cash flows should be chosen. In this case, Alpha is this project. The accounting rate of return also tells us the project that will have more or less profits at the end of the period. The project that has less ARR will have less profits while the project with more ARR will have more profits. From the calculations, Alpha has the highest ARR, therefore, it will yield the highest profits. It should therefore be preferred. Lastly, by looking at the payback period, we need to choose the project with the shortest period. Payback period indicates the time that the project will take before it repays its initial cost of initiation. The project that meets this condition earlier is more preferred as it enables the owners to begin enjoying the profits earlier. Alpha has the shortest period, hence it should be chosen. It is a method of evaluating investment by taking the average accounting operating profit that the investment can possibly make and dividing with the average investment made over the life of the project. It expresses this as a percentage. This method has a weakness of not being keen on time observation as it does not consider when revenue or losses are made (Elmmendor, 1993). It also does pay much attention to accounting profit instead of the absolute profit realized from a particular project. The bigger the value or ARR, the better the choice for any competing projects subject to these projects not exceeding the projected time, hence ignoring time value of money The method is easy to manipulate but it ignores uncertainty of accounting profits. However, it does have the advantage of relating profit to the amount of investment made as well as giving its answers in terms of percentages which is a preference of some managers. Some of the advantages for using this method is the fact tha t it is easy to use when carrying out comparison on projects. It also has a