Investment to Be Made in the Medco Republic - Case Study Example

Contents Contents 1.0Introduction 2 Aim and Objectives 2 2 Report Structure 3 Chapter # 2 Analysis and Findings 3 2 Investment 3 Corporate Social Responsibility 5 2.3. Foreign Currency Risk 9 3.1. Summary and Conclusion 10 3.2. Limitations 10 3.3. Recommendations 11 References 11 Chapter 1 1.0Introduction Making investment decisions are one of the most critical decisions that organizations have to undertake in order to achieve the requisite growth. As such the focus is always on making investments into projects that provide the required returns and add more value for the shareholders of the firm. However, there are certain risks that need to be taken care of while making the investment decisions and as such almost all the decisions made shall also integrate the risk premiums that need to be charged for undertaking any adventure. These risks can be of multiple in nature and can become more significant when a firm decides to invest in a foreign country. Some of the risks that are unique for such firms include foreign exchange risk, political risk as well as the unique market risk. This is significant due to the fact that Mineral Plc is an international firm having a diverse range of activities across the different countries. This therefore increases the overall risk profile of the firm and projects that it undertake in foreign locations. Aim and Objectives This report will provide an analysis of the proposed investment that is to be made in the Medco Republic. This report is significant due to the fact that there are multiple views within the firm that ask for a different strategy to invest into a country which is war torn and companies are facing significant corporate social responsibility issues. This report will therefore perform the net present value analysis as well as other investment appraisal techniques besides discussing the corporate social responsibility issues that may be faced by the firm while making new investment into the country. 1.2 Report Structure This report will be effectively divided into two sections i.e. first section will be discussing the different findings that are being made after performing the analysis whereas the second section of the report will discuss corporate social responsibility along with a discussion on the different risks of investing into a foreign country. Chapter # 2 Analysis and Findings 2.1. Investment According to the given data, the overall NPV and IRR are 18.79 and 34% indicating that according to both the threshold levels, the project may be acceptable. It is important to understand that the most important criteria that is being followed when choosing a project based on the NPV is the ability of the project to deliver the positive net value for the firm as well as its shareholders. Given the weighted average cost of capital of 15%, the overall NPV is positive indicating that the project is acceptable at this given risk level. What is also significant to note that the calculations made does not incorporate the risks that are specific to making investment into the foreign countries and as such it ignores the various risks such as political risk, foreign exchange volatility etc Based on the criteria of IRR, the total IRR comes to the 34% which is over and above the desired level of 25%. As a rule of thumb any investment that offers IRR greater than the required rate of return shall be accepted and as such the IRR is greater than the current required rate of return hence the project shall be accepted even on this criterion also.1 It is also important to understand that both NPV and IRR have their own short comings therefore they may not be relied heavily as to the most conclusive tools for making investment appraisal. What is however, significant to note that the NPV and IRR are still considered as the better measures of the project returns and thoroughly applied by the firms across the world when making investment analysis' Thus based on the available methodologies of project appraisals, NPV and IRR are considered as most suitable tools. It is also critical to understand that there were different assumptions that have been made according to the information provided. It is assumed that there will be no other information that can impact the analysis and as such the facts provided are considered as final. It is also because of this reason that it is assumed that there will be no impact of specific risks that may affect the calculations. If the impact of the certain other specific risks has to be taken, than the overall required rate of return would have been much higher as the shareholders would have demanded higher returns in order to compensate them for taking extra risk. Corporate Social Responsibility Corporate citizenship2 is one of the most important aspects of contemporary management practices and require organizations to give due credit to the overall strategic importance of this issue. There are five broader themes which are often pursued while analyzing the corporate citizenship behavior of the firm including responsibility of the firm towards community, the overall efforts of the firm to reduce poverty, strengthening democracy and freedom in the society besides ensuring that employee's rights and conditions of work are properly adjusted. (Moir,2001). The recent corporate scandals such as Enron and World Com and subsequent introduction of regulations such as SOX indicated that the overall regulatory environment for the businesses may not be entirely easy as multiple expectations from organizations will force them to become transparent in their accounting disclosures and other issues. Due to corporate scandals of such high nature it has now been expected that the organizations will ensure the implementation of regulated code of conducts in terms of their corporate governance and will follow and implement certain regulations in order to provide a certain degree of confidence to their shareholders. Thus it is argued that the corporate social responsibility as well as corporate citizenship shall be part of the overall organizational strategy of the firm. (Galbreath,2009). However, despite such efforts organizations are still engaged into activities which raise significant ethical corporate citizenship issues. Ethics is also one of the most important aspects of contemporary organization as increasing demands from different stakeholders require that the organizations must not engage into activities which are considered as unethical. The sustainable leadership ethics is therefore considered as an iterative process as it requires continuous improvement of the various inputs, actions and their output. (Scott,2007). What is however, also critical to understand that equating irresponsible corporate behavior with the corporate social responsibility and corproate citizenship may not be entirely true in the sense that organizations often put in place definite structures within their own organizations to follow ethical behaviors and as such the irresponsible behaviors of the firms shall not be equated with the corproate citizenship of the firm. (Navarro & Martinez,2009). There are two major philosophical foundations of the ethics in general which are also applicable to the organization and work environment too. These two systems or philosophical foundations are the deontological and the teleological ethics systems and are largely based on the writings and ideas of Kant and Stuart Mill. The deontological system of ethics often reflects upon the individual's capacity to apply the universal laws of ethics regardless of the actual circumstances. According to this set of principles, ethics are considered as universal and everyone has to follow them in their true spirit. This school of thought if applied to the leadership and ethics within the organization would suggest that the leaders have to follow a certain pre-defined path while negotiating with the issues of ethics and ethical behavior. The implications for such course of action however can be significant too because of high follower expectations that the leaders will demonstrate a particular set of values and ethical behaviors and any off-tracking from such values may result into employee demoralization and de-motivation. Teleological system of ethics however broadens this concept of ethics and discusses it in much larger perspective by also including the relevant consequences of such ethical behaviors or actions also. The ethical implications under this system of ethics are therefore largely focused not on the universal laws of ethics but it discusses the rightness and wrongness of an action from the view point of its consequences. It also means that those actions which may be apparently unethical can be ethical if their actual and overall outcome is in the favor of the majority. This school of thought also therefore gives more credence to those actions of leaders which may be unethical from one point of view but their consequences may be beneficial to the organization as a whole. This also therefore requires that the leaders may engage themselves into activities which can be potentially unethical but their outcome may suggest something else. For example, Wal-Mart has often been accused of many ethical violations, exploitations of suppliers from third world but on the other hand, it has been able to contribute towards increasing the overall well being of the millions of its customers by offering products at low cost thus allowing them to save cost. There is also another important issue of corporate governance and the ethical behavior of the firms and their leadership. The corporate scandals of Enron and World Com have shattered the myth of responsible and ethical corporate behavior thus investors have become relatively more cautious about the different aspects of doing business and are largely questioning certain actions of the organizations. Since shareholders of the firm are often not directly involved in the management of the affairs of the firm and have to rely on the managers and leaders in carefully creating the value for them. In such a scenario, the overall ethical responsibilities of the leaders increase manifolds therefore in order to run the firm in most tactical manner, it is important that the leaders must inculcate an environment of trust as a part of the culture of the organization.(Jones, Bowd & Tench, 2009) The case study of RBS Bank is one of the leading examples of how the irresponsible behavior of the firms even in developed countries can lead to their failure. RBS Bank was exposed in the recent times because of its failure to disclose important accounting information to its board as well as to its shareholders. Billions of dollars of toxic debt in shape of subprime lending which was purchased by the traders of RBS was concealed and not reported to different stakeholders. It is important to note however that the traders who acquired this toxic debt were showered with heavy bonuses and were performing their activities without significant check from either the board or the management.3 These actions indicate the overall ethical consequences of such actions because at one hand, due to non-reporting of these transactions, shareholders suffered huge losses but also the tax payers money have been spent on the bailout plan for the bank. Further, the pension and benefit policy for the executives of the firm also raised widespread concerns because in absence of any significant performance, bank was offering huge bonuses to those executives who were behind the actual failure of the bank. Further the accounting practices adapted by the RBS were also considered as questionable because the accounting disclosures made did not truly presented the actual affairs of the firm and as such even the auditors of the bank failed to anticipate any significant changes that resulted into such disaster. The above discussion indicates that the firms often engage into the irresponsible behavior which can result into their failure. The implications of the above discussion for the firm can be sever given the fact that it has to work in an environment which is known for its violation of corporate social responsibility. The failure of the firm to get away with its environment and ignore the importance of ethical behavior of a good firm may result into a disaster which can create significant problems for the firm in future. 2.3. Foreign Currency Risk Foreign currency risk is important in the sense that it is experienced by almost every firm that operates into international market. Foreign currency risk arises when the value of one currency against the other changes adversely and as such may create the unexpected losses for the firm. In this regard, it is therefore critical for the firms working in the international market to secure themselves against this risk by adapting appropriate financial management policies. One of the tools that firm can use is to engage itself into the process of hedging and enter into derivative transactions with different financial institutions by booking the foreign currency through forward contracts. Forward contracts can offer firm a relative degree of hedge against the unexpected changes in the value of the currency and may limit its losses incurred due to this factor. It is also important to understand that the relative volatility of the different currencies as compared to other countries is large. In this case, since the country has significantly large political risk, it is assumed that the overall currency volatility will be higher too. In such situation, it is therefore really critical that the risk premium for the higher foreign currency volatility shall be incorporated into the rate of return required from this project. For entering into any forward contract, it is also significant to note down that the firm need to negotiate with the banks in the home as well as host country. Further, the understanding of the rules and procedures for the repatriation of funds shall also be taken care of in order to ensure that the funds earned in the shape of profits are easily repatriated for appropriation purposes. Chapter#3 3.1. Summary and Conclusion Investing into foreign markets is one of the most critical tasks that organizations have to perform as such investment decisions require the firms to take risks which may be unique in nature. Based on the give data, it is estimated that the proposed investment may be undertaken because it can generate positive returns for the firm. It is however, critical to note that the firm must also initiate and take responsible actions and must prove itself as a responsible corporate citizen with a very well defined code of ethics to follow. 3.2. Limitations As discussed above that the NPV and IRR have their own traditional weaknesses and may not be considered as the conclusive tools for making investment decisions. However, NPV and IRR are still two of the most important tools that are being used and as such despite their traditional weaknesses, these two methods may be most suitable for the purpose of analysis. What is also significant to understand that the whole discussion on the corporate social responsibility is undertaken with the purpose of outlining practical examples of some of the most critical and important corporate scandals so as to make a case for the firm to engage into responsible corporate social behavior. 3.3. Recommendations Based on the above discussion, it is recommended that the firm must undertake the proposed investment because this project will return positive net value to the firm. It is also important to note that the firm must also need to define its activities to be undertaken into the proposed country and must adhere to the responsible behavior despite the fact that other firms may not be engaged into such behavior. This will be more critical for the overall strategic success of the firms in new markets also as the responsible behavior often result into more market acceptability as well as increased profitability for the firm. What is also important to note that the firm must also prepare a detailed study of the local conditions of the country as due to historical volatile situation of the region, it may be a greater risk to invest into such region. However, if there is more insistence on investing than it is recommended that the firm must increase its threshold rate in order to accommodate its shareholders for increased risk. References 1. Galbreath, (2009) Building corporate social responsibility into strategy. European Business Review. 21 (2) 109-17 2. Jones, B & Bowd, R (2009) Corporate irresponsibility and corporate social responsibility: competing realities. Social Responsibility Journal. 5 (3) 300 - 310 3. Moir, L (2001) What do we mean by corporate social responsibility'. Corporate Governance. 1 (2) 16-22 4. Navarro, J & Martinez, A (2009) Linking corporate social responsibility with admiration through organizational outcomes. Social Responsibility Journal. 5 (4) 499 - 511 5. Scott, S (2007) Corporate Social Responsibility and the Fetter of Profitability. Social Responsibility Journal. 3 (4) 31-29 Read More