This paper presents an analysis and discussion regarding investment decisions of Smart Electronics PLc. This is a multi-business enterprise that is listed in the Hong Kong and London Stock Exchange. The company is said to consist of mobile devices, home devices and devices for industrial use. For the last three years the overall profitability has not been as desirable. The Managing Director is under pressure to show and account for better results. The Mobile Devices division has just invented a new electronic device which when installed on a vehicle informs how many miles the vehicle is travelling per gallon. This enables the driver to calculate the associated cost. The division has undertaken some marketing and cost studies to specify the estimated costs and marketing capability. They have been provided with costs which are a subject of analysis of this paper. Required are the following aspects as covered here below:
The net cash inflow anticipated from sale of the device for each year over the next 12 years. In the calculation of this, the future incomes are discounted at the rate given. Costs accruing are also computed. The difference gives the net cash inflow for the subject year
(a) Required to determine the Net Present Value of the investment. This is computed by getting a total of the above cash flows.
24,904 + 49,690 + 56,647 + 64,577 + 73,617 + 83,924 + 95,673 + 109,067 + 124,337 + 20,249 – 115,420 – 367,157
Net Present Value of the investment is ? 220,108
Since the answer above is positive, which represents the worthiness of the investment, then it should be implemented. This is because positive value means that the investment makes money and earns a return. It is worth to be undertaken.
The profitability index is calculated by dividing Net Present Value by the Initial outlay. This is shown below:
NPV = 220,108/630,000 = 0.35
The above answer being more than zero means that a return is earned by the investment. It can therefore be executed.
(b) This part deals with an evaluation of how the rate of return on the investment can be used to define future strategic options and measures of managerial performances within the organization. The rate of return is computed by dividing the interest of profit earned by the capital invested (Hoang, 2007). Where the rate is high, the investment to be undertaken is risky. Such an investment is therefore to be avoided in any strategic planning of the future. Where the rate sought is low, this means that the investment is less risky; it is a secure investment (Graham and David, 1951). In any plans for investment purposes, a less risky investment should be given priority over a risky one.
In measuring managerial performance, it is evaluated whether the rate sought has been achieved or not. Where the funds invested have brought in a return, as envisaged by the investment, then that shows good managerial performance. Where the rate of return sought is not achieved, the rate turns out to be lower then the management team is deemed to have underachieved. Where it is surpassed, that indicates good or impressive managerial performance.
The intended consequences of division are to achieve autonomy of each category so that they are independent of each other. It becomes easy to manage a small enterprise rather than a larger one. Where they are divided, it would be fast to make decisions, supervise operations and monitor the progress being made. This has an effect of improving the performance since there is adequate supervision and control of the operations.
The unintended consequences of division would include having to have a multiplicity of roles. Costs would no doubt increase where there is a division. The human resource is also not adequately utilized. It would become expensive when operations are running independently of each other and since all of them are related. It would be the wastage of resources running the operations differently and independent of each other.
(c) This chapter gives recommendations to the Board of Directors on the means of achieving high profitability in the following year. The company deals with devices. They have home devices, industrial devices and mobile devices. From the above analysis it is seen that the investment in the mobile devices would earn a return to the company. This must be implemented since this is a sure way of earning income to the company, hence realizing the sought after profits.
Dividing the divisions may not be the best or ideal path. Since they are all related, they will be done together and then differentiated after production, so as to have them for various destinations. This would save the company from unnecessary costs like labour costs and the need to hire or acquire different machinery.
Production should be done only up to the optimal levels. Where extra production results to less income, that should not be allowed. It should only be done to the levels whereby the marginal rate of production equals to zero. This means that the factors of production of labour and capital are well utilized for general financial well being of the company.
Marketing opens up new avenues for extra sales. This would constitute more income to the company. It should be done so that sales for the company are increased, hence higher income and thereby profits.
Lastly, all the costs must be minimized to their bare minimum. Since this constitutes expenditure, they would reduce profits; they ought to be minimized so that profits are not lowered. This would in turn increase incomes of the company and thereby realize the profits so desired by the shareholders.