APPLICATION OF ACCOUNTING METHODS AND TECHNIQUES IN APPRAISING RIVAL PROJECTS IN SITUATIONS OF RISK AND UNCERTAINTY

ABSTRACT

In the practical word of business, certainty is a luxury rarely enjoyed by investors. Quite often, investor have to make very important investment decisions in situations of uncertainty and risk.

This study looked into the use of accounting methods and techniques. When appraising rival projects in situations of risk and uncertainty. The study tried to ascertain the extent to which individuals and businesses use accounting techniques and methods, when appraising rival projects in situations of risk and uncertainty.

In the process of carrying out the study, secondary data were gathered from books and journals, while primary data were obtained through personal interview and questionnaires administered to select business executives, accounting and to accounting staff of the accounting section of various organizations.

Simple percentage and chi-square techniques were employed in analyzing the data and testing of hypothesis formulated.

The findings included amongst others:

1.       In practices most companies do not use accounting methods and techniques to incorporate risk and uncertainty when appraising rival projects

2.       Rival projects selected in situations of risk and uncertainty using accounting methods and techniques generally perform better than other projects.

Based on these findings, some recommendations were put forward for consideration in chapter five.

CHAPTER ONE

1.1     BACKGROUND OF THE STUDY

Many accounting techniques and methods are available for appraising projects. Such techniques include: the net present value (NPV), internal rate of return (IRR), accounting rate of return (ARR), the profitability index (PI). Many of the accounting techniques available for appraising projects is based upon a basic assumption of certainty as regards the ultimate outcome of an   investment opportunity. This assumption of certainty makes such techniques unrealistic and therefore inadequate in appraising projects in the practical world of business.

Since conditions of certainty are not tenable, or are at best very rare, in the investment world,  it  becomes  imperative to  make  an enquiry  into  the  use  of accounting techniques in appraising rival projects in the situations of uncertainty and risk. In the practical world, mangers of business often have to make decisions in situations of risk and uncertainty as regard which   project to invest in or which project to reject. Such decisions, if necessary made, could result in heavy losses to the organization. In order to be able to make the best decisions in such situations, mangers should be aware of the various techniques which could be used in appraising the projects to determine their viability or otherwise.  Managers should also be aware of which     particular techniques to use in any particular given situation.

To a large extent, it is this need for managers to be able to make decisions when appraising projects in situation of risk    and uncertainty that motivates this study into   this particular topic.

1.2     Statement of the Problem

Investors in the business world of risks and uncertainties are confronted with problems of selecting rival projects. This may be due to in adequacy of funds, limited managerial ability and mutual exclusiveness of some projects, investors, have to choose between two or more rival projects.

This research will also try to compare the performance of those businesses that use accounting techniques to appraise their projects in situation of risk and uncertainty with the performance of those businesses that do not use .

1.3     Objectives of the Study

The objectives of this study will include the following:-

i.        An evaluation of the various accounting methods and techniques available for appraising projects in situations of risk and uncertainty.

ii.       Ascertain the extent, if at all, company management use accounting techniques when appraising their rival projects in situations of risk and uncertainty.

iii.      A comparative analysis of the performance of companies that use accounting techniques in appraising their rival projects in situations of risk and uncertainty with that of companies that do not.

1.4     Significance of the Study

Up to now, companies and organizations have tended to dwell so much on those accounting techniques which assume certainty as regards the outcomes of projects. However since situations   of   certainty   are indeed very rare   in the investment world, the significance of this study can hardly be over-stressed.

When completed, this study will help in highlighting to companies, those accounting techniques available for appraising projects in situations of risk and uncertainty in order to achieve higher returns and maximize the utility of the organization.

This study will also serve to highlight the highpoints and short-coming   of these various techniques and also establish which methods would be best to use under given conditions.

Finally, this study will also be significant in the area of aiding other researchers and research scholars who may wish to carry out further research on the subject matter or on other related topics.

1.5     Research Questions

i.        What are the various accounting techniques available for appraising projects in situations of risk and uncertainty?

ii.       What are the highpoints and short-comings to these techniques?

iii.      To what extent, if at all, are those techniques being used by organizations in practice?

iv.      Does companies that use accounting techniques in appraising rival projects in situations of risk and uncertainty perform better than other companies that do not use these techniques?

1.6     Research Hypothesis

The following hypothesis shall be subjected to testing:

1.       Ho:    Business, in practice, do not use accounting techniques in appraising projects in situations of risk and uncertainty.

Hi:     Business, in practice, use accounting techniques in appraising projects in situations of risk and uncertainty.

2.       Ho:    There is no difference between the performance of businesses that use accounting techniques in appraising their

projects in situation of risk and uncertainty and those that do not use them.

Hi:     There is different between the performance of businesses that use accounting techniques in appraising their projects in situation of risk and uncertainty and those that do not use them.

1.7     Conceptual and Operational Definitions

1.       Cash Flow

“Is  the  same thing as  the  various receipts and payments that are  made throughout the life span of a project”. These receipts are termed cash inflows, while payment are termed cash outflows.

2.       Certainty:

This is a situation “Where a potential investor has full knowledge of the ultimate outcome of an investment opportunity”. A condition of certainty exist where the probability of realizing out come is one.

3.       Capital Rationing

This is the allocation of scare capital resources among competing economically desirable projects which cannot all be carried out due to capital or other constraints.

4.       Management

This refers to a group of  people charged with the responsibility of directing, planning, controlling, organization to ensure the achievement of organizational goals and objectives.

5.       Ranking

This is the arrangement of projects in order of preference or viability.

6.       Risk

A condition of risk exist “Where an investors knows the range of possible outcome  to  expect  from  an  investment  opportunity as  well  as  the  likelihood (probability) of each outcome.

7.       Uncertainty

This is a situation of near ignorance of the future outcome of decisions. It arises where the decision taken has no dependable information about the nature of significance of factors which affect the investment.

1.8     Limitations of the Study

The scope of this work is limited by the following:

i.        Time: The time available to the researcher to carry out this piece of research could not allow very extensive research into the subject matter. In addition, the researcher also has to carry out her normal class work along side this research project.

ii.       Finance:      the amount of funds available to the researcher also helped to limit the scope of this wok. Some materials that may have aided the research could not be acquired, also transportation costs and cost of other logistic did not allow the researcher to visit all the companies she would have wanted to visit.

1.9     Scope of the Study

This  study  has  been  designed  to  cover  investment  decisions  of  profit oriented  organizations  in  situations  of  risk  and  uncertainty.  Thus  charitable organizations and non profit making organization are outside the scope covered by this study.

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