A.C. 3.2 – Analyse the viability of a proposal for expenditure


According to De Andrade et al. (2011), the viability of a proposal for expenditure is identified through different methods for approving or denying a proposed capital investment on a cost/benefit analysis.  The viability of a proposal for expenditure can be identified through;

  • Accounting rate of return method
  • Payback method
  • Discounted cash flow methods, such as the net present value (NPV) method and the internal rate of return method

The rationale for selecting these methods is informed by the fact that they are applicable to the capital projects that end up with quantitative analysis or generating cash inflows through additional revenues or expense reductions. It is normally challenging quantifying labor or other cost savings or additional revenues in the analysis of capital expenditures for the office furniture, computer systems among others. In this case, the decision-makers in Tesco Plc focus on the judgement in lieu of quantitative methods in deciding of the expenditure is justified. The judgement of the proposals in Tesco Plc is as shown in table below;

Desired Features Rate of return Payback Net Present Value Internal Rate of Return
Useful for “quick and dirty” screening X X    
Easily understood   X    
Considers cash flows of project   X X X
Considers time value of money     X X
Considers entire project life     X X
Incorporates cost of capital into calculation     X  
Allows comparison to cost of capital rate or an X alternative acceptable rate of return X     X
Explicitly considers project risk     X  
Indicates project liquidity   X    

It is essential for organisations to adopt a discounted cash flow practice for evaluating the most ideal proposed capital investments. The approaches that are non-dcf strategies including the payback and accounting rate of return methods could be assisting in evaluating the less significant but the most relative short-term propositions capital investment projects.

A.C. 3.3 – Identify the strengths and weaknesses and give feedback on the financial proposal

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