Appraisal of Capital Projects
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The implications of inflation for financial accounting were discussed in earlier chapters. This focus on financial accounting is consistent with the generally accepted interpretation of the term ‘inflation accounting’. However, inflation creates further accounting problems which, if ignored, may lead to inadequate (or incorrect) accounting information. The management accountant of a business enterprise is generally responsible for the provision of information to assist managers in their decision-making. If the management accountant ignores the impact of inflation on the information he is collecting, summarising and communicating to management, the decisions taken by those managers may not be optimal. In Chapters 8 and 9 the implications of inflation for management accounting will be discussed. The provision of information for short-run operating decisions and budgetary control are discussed in Chapter 9, while this chapter is concerned with the use of discounted cash-flow methods of appraising capital projects.
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Notes and References
- 1.For this chapter a familiarity with the basic principles of discounting is assumed. A brief explanation for the reader not familiar with these principles is given in the appendix. For a more comprehensive discussion of the D.C.F. techniques of project appraisal, see M. Bromwich, The Economics of Capital Budgeting (Harmondsworth: Penguin, 1976).Google Scholar
- 2.H. Bierman, Jr and S. Smidt, The Capital Budgeting Decision, 2nd edn (New York: Collier-Macmillan, 1969) p. 29.Google Scholar
- 7.Such practices were reported in an empirical study by B. V. Carsberg and A. Hope, Business Investment under Inflation: Theory and Practice (Institute of Chartered Accountants in England and Wales, 1976).Google Scholar