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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
2. Rival projects selected in situations of risk and uncertainty using
accounting methods and techniques generally perform better than
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
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
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
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
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
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.
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
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.
This is the arrangement of projects in order of preference or viability.
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.
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
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
Bromwich, A. Economics of Capital Budgeting (London; Pitman, 1996)
Emekekwue, P Corporate Financial Management (Kinshasha; African
Bureau of Educational Sciences, 1997) p. 21-22, 103-107.
Lucy, T. Management Accounting, 4th Edition (great Britain: Ashford
Colour Press. 1996)p. 240.
Osisioma, B.C. Study in Accountancy (Enugu: New Age Publishers,
Solomons M, Studies in cost Analysis (Great Britain: Sweet & Maxwell,