Application of Accounting Methods and Techniques in Appraising Rival Projects in Situations of Risk and Uncertainty

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:

• In practices most companies do not use accounting methods and techniques to incorporate risk and uncertainty when appraising rival projects
• Rival projects selected in situations of risk and uncertainty using accounting methods and techniques generally perform better than other

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.

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