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