Question

QUESTION THREE:

3.1 Assume that a firm is offered 2/10 net 30, indicating that if the account is settled in 10 days, the firm may keep a discount of 2%. If the discount is not taken, then the full amount is payable in 30 days.

Required: Calculate the cost of foregoing the discount.

3.2 Differentiate between the various aims of appraising projects

Answer 1

3.1

The above mention scenario means, if the firm pays its bills within 10 days then the firm will get 2% discount if pays after the 10th day then the discount won’t be given and the bill will be due in 30 days.

Here, we calculate the cost if the firm doesn’t take the discount.

Formula = Discount percentage / (1-discount%) X [360/(full allowed payment days – discount days)]

= 2% / (100% - 2%) X [360 / (30 - 10)]

= 2.0408% X 18

= 36.73%

Step by step approach

Divide the discount percentage, 2% by (100% - 2%), It equals 2.0408%

Divide 360, by the sum of full allowed payment days (30 days) minus allowed discount days (10 days), It equals 18

Multiply the result of 2.0408% by 18, It equals 36.73%. It is the cost of not taking the discount.

3.2  

Project appraisal means a pre-investment analysis of the project to determine whether the same should be implemented or not. It includes a wide range of analysis of the alternative approaches for selecting the best outcome in respect of location, technology, market size, financial cost benefits, organizational setup, social aspects of the projects, and various other relevant aspects.

Project appraisal acts as an aid to investment decision assumes special significance when the factor of productions such as capital, foreign exchange, or labor is to be rationed in terms of alternative uses to which it can be put. Time is another important factor that plays a big role in appraising investment decisions.  

Aims of Project appraisal

Project appraisal is necessitated because the resources are limited as compared to the needs of society. As a result, any investment undertaken implies depriving other project resources. In other words, before the allocation of resources for a particular project, the decision making authority must convince itself that the proposed project is the best and most economic way of achieving the desired objective in terms of socio-economic benefits.

One of the most important constraints is the completion of the project within the estimated time while keeping the expected quality and estimated budget. So the efficient management of investment resources and continuous valuation of investment outputs are the two most crucial activities necessary for ensuring the optimum use of scarce resources.