Advance cost accounting Article Example | Topics and Well Written Essays - 500 words

Advance cost accounting - Article Example Hongren, Datar and Foster explain capital budgeting as having six stages that are, in that order, identification, search, information acquisition, selection, financing and implementation and control stages (7). Formal methods employed in capital budgeting that use incremental cash flows of potential projects include techniques such as discounted cash flow, internal rate of return, equivalent annuity, net present value, payback period and profitability index. Essentially, through the discounted cashflow method, the expected outward and inward flow of cash in a project are calculated as if they took place together at one time so they can be averaged appropriately. The net present value and internal rate of return are methods of discounted cash flow, and the internal rate of return is a function of the expected net annual cash flow and present value annuity factor (Hongren, Datar & Foster 19). Compared to internal rate of return, net present value is more advantageous because its end re sult is not expressed as a percentage but, rather, in dollars, and it provides the opportunity to add individual projects. Further, it is applicable in situations in which the required rate of return of a project varies throughout its life. On the other hand, it is not possible to add or average a project’s individual rate of return to derive internal rate of return of several combined projects (Hongren, Datar & Foster 22). Through the identification stage, the need to consider venturing into a new project is identified by the management, and several alternatives will be yielded in the search stage, although the focus will remain on a particular project (Hongren, Datar & Foster 8). Decisions deemed to be of a strategic nature call for the management to consider a wide scope of factors that cannot be easily estimated. While information will be acquired by the administration in