Differences between FIRR & EIRR

 

Differences between FIRR and EIRR

Aspect	FIRR	EIRR
Stands for	Financial Internal Rate of Return	Economic Internal Rate of Return
Definition	Measures the return on investment based on actual cash inflows and outflows from the perspective of the investor or organization.	Measures the overall economic benefit to society, including externalities and indirect benefits/costs.
Focus	Financial viability of the project for the implementing agency.	Economic desirability of the project for the society as a whole.
Costs Considered	Only financial costs (capital, operating, maintenance).	Includes financial costs plus social and environmental externalities.
Benefits Considered	Only monetary returns (e.g., revenue, savings).	Both monetary and non-monetary benefits (e.g., time savings, environmental improvements).
Subsidies/Taxes	Included in the calculation.	Excluded, as they are transfers and not real resource costs.
Discount Rate	Based on the cost of capital or desired return.	Based on social discount rate (usually lower).
Example	A railway project yields FIRR of 10% based on ticket revenues and costs.	The same railway project has an EIRR of 18% when time savings for passengers and reduced pollution are included.

SPV - Special Purpose Vehicle

SPV – Special Purpose Vehicle

 

Key Takeaways

ü  Separate legal entity

ü  To achieve specific objectives/goals

ü  Isolated from the firm

ü  Can leverage future earnings to raise funds

Salient features

·         Definition of SPV – A fenced organization having limited predefined purposes and a legal personality.

·          Also called as SPE – Special Purpose Entity (in USA) or SPC – Special Purpose Corporation or FVC – Financial Vehicle Corporation

·         A legal entity created to fulfil single, well defined and narrow objective/purpose.

·         Typically used by firms to isolate the firm from financial risk

·        ·          Primarily, a business association of persons or entities eligible to participate in the association.

·          Usually formed to raise funds from the market by collateralizing future receivables.

·         It is independent of members subscribing to the shares of SPV.

·         Concept: Usually, a sponsoring firm hives off or transfers its assets or activities from the rest of the company into an SPV. This isolation of assets is important for providing comfort to investors. The assets or activities are distanced from the parent company; hence the performance of the new entity will not be affected by the ups and downs of the originating entity. The SPV will be subject to fewer risks and thus provide greater comfort to the lenders.

·         Basically, a company can leverage future earnings to raise funds.

 

Advantages:

 

ü  Separating the risk.

ü  Protected against risks like insolvency.

ü  Best suited for Project financing.

 

 

Examples of SPVs in India

1.       NHSRC - National High Speed Rail Corporation. The Company has been modelled as ‘Special Purpose Vehicle’ in the joint sector with equity participation by Central Government through Ministry of Railways and two State Governments viz. Government of Gujarat and Government of Maharashtra.

2.       LTMRHL – Larsen & Toubro Metro Rail Hyderabad Limited (for Hyderabad Metro)

3.       IRSDC - Indian Railways Station Development Corporation ltd (by RLDA & IRCON)

***

 

MBO - Management By Objectives - MA - Management Accounting

 

MBO - Management By Objectives

• What is MBO ? MBO - Management by Objectives is a strategic management approach that aims to improve organizational performance by aligning individual employee objectives with the overall goals of the organization. 

 

• Introduced by Peter Drucker in his 1954 book, "The Practice of Management,".

Key Steps:

1. Define Organizational Goals: Management identifies the organization's overarching objectives, providing a clear direction for all departments and employees.

2. Set Individual Objectives: Managers and employees work together to establish specific, measurable goals for individuals that align with the organization's aims.

3. Continuous Monitoring: Regular tracking of progress ensures that both organizational and individual objectives are on course.

4. Performance Evaluation: Assessments are conducted to compare actual performance against the set objectives.

5. Feedback and Rewards: Constructive feedback is provided, and achievements are recognized, often through rewards or incentives.

Benefits of MBO:

• Enhanced Communication: Promotes open dialogue between managers and employees, ensuring clarity in expectations.

• Employee Motivation: Involving employees in goal-setting increases their commitment and motivation to achieve targets.

• Alignment of Objectives: Ensures that individual goals are directly linked to the organization's mission, fostering a unified direction.

Limitations of MBO:

• Overemphasis on Goals: Focusing too much on specific objectives may lead to neglect of other important aspects of performance.

• Rigidity: The structured nature of MBO can sometimes hinder flexibility and adaptability in dynamic environments.

• Short-Term Focus: There's a risk of prioritizing immediate objectives over long-term sustainability and innovation.

In the context of management accounting, MBO serves as a valuable tool by providing clear performance metrics and facilitating the alignment of individual efforts with financial and strategic goals. 

This alignment aids in budgeting, forecasting, and performance evaluation, ensuring that all organizational activities contribute effectively to the desired financial outcomes.

***

PERT & CPM ( Management Accounting )

 PERT & CPM

• PERT Stands for Program Evaluation Review Technique 

 

• Meaning: Concise visualization of all the individual tasks ( or operations) to complete a given Project. 

• Individual tasks divided into i) Events  ii)  Activities 

• All are placed in Sequential Order 

• Various time estimates are prepared for each activity. 

• The Sequence in which the activities are scheduled to be performed to create “PATHS” from the beginning to end of the Project. 

• The time required by the “PATHS” is determined by totaling the time for each activity along the path.   

• Total 3 Estimation Techniques

1. Most Likely (TM)  - Probable duration  

 

2. Optimistic  (TO) – Shortest duration

3. Pessimistic (TP) – Longest duration 

• PERT formulae   =   TO + (4 x TM) + TP / 6 

 

• Example:  TM – 15 days,  TO – 10 days & TP – 25 days          

PERT =  {10 + ( 4 x 15) + 25}  = 10 + 60 + 25 = 95 / 6 = 16 days  

• Critical Path Method (CPM) :  Longest time path through the network will control the schedule for the entire project. 

• PERT & CPM – Both used to scheduling the Organization and coordinating the Project.   

Events	Predecessor
1	-
2	1
3	1
4	1
5	2, 3
6	4, 5

Differences between

PERT	CPM
1.Unpredictable	1. Predictable
2. Non Repetitive	2. Repetitive
3. Suitable for R & D	3. Suitable for Batch Costing  (Rolling stock production)
4.  Time only taken into account. But Cost will not be considered.	4, Both Time & Cost will be  considered
5. Activities represented as Lines & the  Nodes Representing the Branching  Structure	5. Activities are represented as Nodes
6. Total 3 Estimates.  A. Optimistic   B. Pessimistic  C. Most likely	6. Only one estimate i.e., Longest path
7. Only one type of Activity Relationship  i.e., Finish to Start	7. Total 4 types of Activity Relationships.   A. Finish to Start  B. Start to Start C. Finish to Finish  D. Start to Finish

****

Study Material on Expenditure (English & Hindi), Books & Budget (English & Hindi), GRP Part 1 (English & Hindi), GRP Part 2 (English) and Management Accounting (English)

Study Material Index 

By Nageswara Rao M, 9492432160

 

English Medium
Subject	No of pages	No of Topics	No of MCQs
GRP Part One	165	68
GRP Part Two	277	33	289
Books & Budget	126	42
Expenditure	240	80	139
Management Accounting	113	42
Total	921	265	428

 

अध्ययन सामग्री सूचकांक

 

हिंदी माध्यम
विषय	पृष्ठों की संख्या	विषयों की संख्या	एमसीक्यू की संख्या
जीआरपी भाग एक	157	68
जीआरपी भाग दो	कुछ ही देर में
बुक और बजट अध्ययन सामग्री	125	42
व्यय अध्ययन सामग्री - अक्टूबर, 2021	245	78	139
Total	527	188	139

 Coming soon:

1. Differences between Questions & Answers

2. Advanced Bookkeeping

3. Traffic Accounts 

4. Workshop Accounts

5. Stores Accounts

6. The study material for LDCE of Departments (other than Accounts)

7. GRP Part Two (Hindi Medium)

Click for Details of Study Material Index