Incident Command System - Capital Budgeting - Essay Example

Running Header: Incident Command System Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: INVESTMENT SUMMARY Investment is very a crucial part in every management of any company since it directly affects cash flow of the company and shareholder wealth. The core purpose of the management is always to maximize shareholder wealth, maximize profit, minimize cost, and maximize sales. Therefore, we carried out various analyses before we ventured into various projects during the year. The analysis-involved use of discounting capital budgeting models and non-discounting models that includes Net present values, average rate of return, payback, and internal rate of return and profit index analysis. INVESTMENT RATIONALE We accepted projects in the following criterion: i. Strictly positive net present values are given priority. ii. Given budget as constrain in implementing all the projects at once projects that maximizes NPV are considered. iii. Projects with short payback period are given priority if a net present value of the projects is same (Period in which all the cost incurred is recovered). iv. Strictly greater projects with profitability index greater than one is accepted; though exemption can apply where the project has, nonmonetary benefits for example part of corporate social responsibility. v. The project should prove that it could pay off the cost incurred and at a higher rate. It is our last variable in our decision analysis due to weakness associated with the measure. 1. INVESTMENT SUMMARY FOR THE VARIOUS YEARS INVESTMENT SUMMARY FOR THE YEAR 2009 During 2009, we ventured into five major projects. We agreed on these ventures to improve financial position of the company and above selection were because of management considering the following factors in every project available during the period. Project NPV IRR PI Payback period Economic life(Yrs) Risk status Toddler doll accessory line 6.82 24.80% 11.29 8.7 3.14 low ‘Match my Doll' Clothing Line 9.17 22.24% 9.21 50.01 5.57 High Retail Store Expansion in Northeast 8.68 34.84% 6.00 5.33 1.29 High Warehouse Facility consolidation 3.16 13.46% 14.63 8.23 10.50 medium New Doll Film/DVD 9.25 238.61% -3.79 1.43 3.5 Medium a. Toddler doll accessory line The project targeted toddlers. This was due to the niche in the market of toddlers since most of our competitors concentrated more on teen and adult accessories forgetting the toddlers market. The project looked so attractive and we decided to budget for the project. b. ‘Match my Doll' Clothing Line The project aimed at coping with the trend of children through production of clothing in line with the types of dolls like in order to match them together. The project is involving and is associated with high risk since the trend of likes keeps on changing and the company should be able to cope immediately with the change. However, the risk did not deter the management from making investment because proper measures could see the company performance grow tremendously. c. Retail Store Expansion in Northeast We considered opening new retail shops in northeast in order to increase market size for which it will encourage growth in sales and earnings of the company. The project was considered risky due to increase in the scope of control bringing about diseconomies of scale. However, we deliberated on the procedures of minimizing the risk associated to the project. The project was implemented immediately in order to take up opportunity in the market before any other competitor does. d. Warehouse Facility consolidation We considered the cost that incurred in running several warehouse of the company and compared with the cost incurred by operating one centralized warehouse in order to save the cost. The project showed positive return since the cost of operating one warehouse saved cost than having decentralized warehouse system where we could involve many staffs in operating this warehouse. In addition, the decentralized warehouse reported theft losses, which we considered we could reduce by having few warehouses where we could control inventories receipt and dispatch. e. New Doll Film/DVD The project is aimed at diversifying and increasing investment portfolio of the company by investing in Hollywood studio to reduce the risk that may arise in any given market and it was estimated to be medium. This reduces chances of company going into financial distress and increase the earning from theater work as compared with the previous years. We invested on the project basing our decision on the budget constrain and importantly the capital budgeting model. Therefore, we considered the project would be given priority because of the benefit that accrues the project. SUMMARY FOR THE YEAR 2010 We budgeted for 2010 and aim remains to be cost minimization, shareholder wealth and revenue maximization. The following projects were budgeted for having considered all the factors that may affect rate of return to the funds invested. Project NPV IRR PI Payback period Economic life cost Risk status 'Dolls of the World' Initiative 9.63 21.84% 2.3 9.93 7.11 low 'Grow With Me' Doll Line 10.64 20.4% 1.62 >10 9.15 High a. 'Dolls of the World' Initiative We felt that the market we are operating in have been fully utilized by servicing demand in the present market. Therefore, we came up with a project that will enable company to venture into new markets such as the USA and the main aim is to tap unsatisfied demand due to the gap created by our major competitors that is investing in the line of tween girls. We looked into viability of the project, we implemented the project since IRR, and NPV shows positive and attractive aspects that will increases cash flow circulation in the company that saves company cost incurred due to time value of money since money is prone to loss value due to inflation and other risk in the market. b. 'Grow With Me' Doll Line ‘Grow with me’ project was aimed at filling in the gap that existed in the market since during a child growth, needs for leisure changes and to fill this gap, we analyzed the viability of another new line of products of doll that is electronic in nature. The price is fixed lower than the other doll and ensure that child is being bought new doll within a slightly short interval this increases volume of sales. SUMMARY FOR THE YEAR 2011 Project NPV IRR PI Payback period Economic life(Cost) Risk status Replacement of assembly equipment 0.06 38.64 % 0.86 3.08 0.08 Low Expansion of Concept 9.68 27.6% 3.21 7.69 4.87 Medium New East Coast Distribution Facility 12.12 21.08% 1.21 4.92 16.00 High Doll Video Game 1.03 115.9% 8.54 2.42 0.4 Medium a. Replacement of assembly equipment at Sacramento Facility As management, we decided to purchase a new machine in order to improve on efficiency and quality of the products since the market is expanding. Consequently, the number of competitors are increasing therefore, purchasing the machine will enable the company to maintain its market share and at the sometime satisfying the growing demand. The replacement decision proved to be viable since projections were attractive as shown above. Low risk associated to the project was another factor that drew more of our attention so we implemented the project right away. b. 'Match My Doll' Clothing Line, Expansion of Concept Due to previous season performance, we are anticipating increase in demand for in clothing line. Therefore, we are considering expanding the production in order to meet the expected growth in demand and this increase the earnings for the company. The project was to commence immediately in order to maintain customer satisfaction and ensure loyalty. c. New East Coast Distribution Facility Due to the growing cost of distribution, we decided to open a distribution facility in order to reduce the cost of transportation and reduce delays caused to customers thus improving on customer satisfaction, which in return develops customer loyalty to company’s product. The project was passed unanimously since it showed good prospects in future for the company wealth maximization. d. Doll Video Game We identified a gap in Doll video gaming since the current video gaming only give platform for one player and due to the need to develop game that allows child-parent completion, we implemented a project to develop video gaming that support above need. This could result to greater sales since it attracts parents because it creates a great moment for them to challenge, interact, and mentor their kids. SUMMARY FOR THE YEAR 2013 Project NPV IRR PI Payback period Economic life(Cost) Risk status EDI Supplier Software System 0.05 40.76% 1.66 3.5 0.05 Low-medium 'Design Your Own Doll' 14.65 23.24% 2.63 7.99 9.86 High Expansion to England 1.59 20.36% 1.98 9.63 0.8 High Virtual Doll Community 5.83 402.58% 258.9 2.06 0.18 High Bookstore Café and Writers' Club 9.35 51.00% 18.7 4.44 0.5 Medium Toddlers Music CD Series 6.26 104.76% 20.85 2.09 1.03 Medium a. EDI Supplier Software System We decide as management to introduce a net EDI supplier Software System to improve our company efficiency and reliability after carrying out evaluation and it showed feasibility since it return could be earned in the process and it will pay back the fund invested within a short period of time thus allows funds to be reinvested on other projects. b. 'Design Your Own Doll' The project implementation was delayed because we needed time to gather all the required resources to implement it. The project showed high return on funds invested thus maximizing the shareholder wealth. Invested funds to this project showed recovery within a short period. c. Expansion to England We looked into possibility of expanding our market in England and the project proved viable since it had high chances of the project paying off the cost incurred. In addition, realize some returns from the investment. d. Virtual Doll Community The project showed attractive returns since we are pioneers in the market. The project came up due to having listened to what the people say and lack in the market and we realized need to close the gap immediately to avoid any other competing company take the opportunity. Therefore, we made the decision to invest in since it improves the company performance. e. Bookstore Café and Writers' Club The project aimed at bringing together writers and collection of books in which club members compare their works. In addition, they could sell them to the customers and earn revenue from the project thus improving company’s performance. f. Toddlers Music CD Series Toddler entertainment was one of the important projects since parents needed something to sooth their children and little as been done in the market to satisfy this niche. The music CD was sold in all of our outlets all over the country. The prices are fixed in the headquarters of New Heritage Company. SUMMARY FOR THE YEAR 2013 Project NPV IRR PI Payback period Economic life(cost) Risk status Children's Accessories Line 1.19 12.8% 0.63 >10 2.74 High Dollhouses with Miniature Dolls 12.76 28.99% 3.72 7.74 4.73 High Coupon Promotion 7.33 26.22% 7.99 4.44 5.63 Low a. Children's Accessories Line Management realized the market of children was not fully satisfied and we came up with children’s Accessories line of products to tap on the unsatisfied market. Evaluated results proved to be attractive. Therefore, we implemented the project immediately to capitalize on the opportunity. The risk associated to this project is expected to be high but the merits outweigh the underlying risk this does not rule out our decision in investing on the project. b. Dollhouses with Miniature Dolls Infant market was discovered and the to tap on the business opportunity, we implemented a project on Doll houses with Miniature Dolls in order to satisfy infant market. Analysis of the projection on the returns of the project proved to be attractive and safe to invest shareholders funds. c. Coupon Promotion or Frequent Shopper Campaign program Coupon promotion project is one of our major projects. It aims at improving the earnings from all other projects we implemented in during the budget period and previous years since it is advertising strategy of the company. This works out by stimulating customers and inducing them to buy more products by visiting our premises. Analysis of the above variables was convincing to invest shareholder funds in it and to be confident safety of shareholders funds, risk associated to the project is low, and returns therefore outweigh risk. 2. BUDGET CONSTRAIN Budget for 2010 was fixed at 19.8. Budgeted cash was sufficient for the company to apportion it to all proposed projects that viable to yield returns and pay back the capital incurred. The company invested on Toddler doll accessory line, ‘Match my Doll' Clothing Line, Retail Store Expansion in Northeast, Warehouse Facility consolidation and New Doll Film/DVD and remain with 3.29 therefore, operating on surplus budget. Availability of enough cash gathered for the investment on projects improves company’s position due to increase in earning because of the investment made on all available feasible projects. Budget for 2011 was fixed at 14.87 a reduction from previous year. The budget was not enough to implement all the projects that had positive net present value therefore, some of the projects are not going implemented. New East Cost distribution facility is forgone for ‘dolls world’ initiative, ‘Grow with me’ doll line and Tween book series. We reached above decision because New East Cost distribution facility needs high capital but the return will not be higher than adopting dolls world’ initiative, ‘Grow with me’ doll line and Tween book series. Thus, capital budget constrain sometime work against revenue maximization and shareholder wealth maximization and sometime projects are pushed to the next financial budget. Budget for 2012 was fixed at 16.79, this was sufficient for the company to invest on all viable projects and remain with 3.05. Though, the company was able to invest in other projects, we had to consider the project life of the projects since they were going to be obsolete in the following year which is way below the payback period thus it was risky to invest on such projects due to fear of incurring losses. Budget for 2013 was fixed at18.96 and it was able to implement all the viable projects during the period. The actual expense was lower than the projected budget. The extra amount is pushed to the following financial budget. 3. DETERMINATION OF THE RISKINESS OF THE PROJECT Risk is any likely event that may lead to loss in any investment. Therefore, it is important variable to be examined before making any investment decision to avoid loss of shareholder funds. As the team of New Heritage Company, we analyzed the risk associated to the projects that we had using various acceptable risk models that includes sensitivity analysis, scenario analysis and Monte Carlo analysis. Sensitivity analysis was carried out to determine fluctuation of net present value of the projects cash flow as the discount rate change. Its rating is, high fluctuation of Net present value equates to high chances of risk, moderate fluctuation is consider medium and low fluctuation to have low risk chances. The company opted to take net present value rather than internal rate of return because it is more realistic and it has few weakness thus conclusion is more reliable to base our decision. To support sensitivity analysis, scenario analysis was carried out where the project performance of net present value of cash flow was examined under three scenarios that is pessimistic, expected and optimistic scenario. The project that had positive values in all three net present values are considered to have low chances of risk and the project that had only one positive net present value at expected scenario was considered highly risky. Net present value of the project was tabulated and we came up with probability distribution, where we determined the confident interval of every project and we used normal distribution table to gauge the result of having positive net present value in any given project. 4. ISSUES ENCOUNTERED IN NEW HERITAGE COMPANY The company board of directors in 2010 decided to cut down the amount allocation for investment from 19.8 to 14.87 soft capital rationing. This was due to allegation that the management was not spending wisely, this resulted to loss of money in the process also they so no need of having unspent cash (3.29), and they agreed to pay dividends since we were operating on surplus budget. This placed us in a dilemma on which projects to implement and which one to implement. We aimed at optimizing our decision without affecting the shareholders objective by doing a lot of analysis of all the projects and we reached an agreement after a long discussion and arguments. Therefore, CEO should encourage teamwork in decision-making and optimize decision for the good of company as a whole. We considered all the projects irrespective of their net present value, risk, and payback period of the projects in order to arrive at a fair decision on the investment. We had to delay Dollhouses with Miniature Dolls project in 2013, this raised concern if we had company interest at stake. We had to send newsletter to all stakeholders addressing the issue on why we delayed in implementing the project. The aim was to reduce speculation that management was reluctant in implementing projects. Though at first they had negative perception, the reasons given in the newsletter convinced them beyond doubt that we are working hard for the company objective. Therefore, lesson learnt is that shareholders should be kept up-to-date on company’s affairs to avoid misjudgment and speculation on what is going on in the company. New doll film brought a lot of concern to shareholders and I had to do something to make them satisfied on the choice of the project. The concern was raised due to a negative value in the analysis of projection, which is open to shareholders to examine. New doll film had negative profit index of -3.79 but very attractive net present values considering the qualities of the model we opted for most stable measure that is NPV. Therefore, we had to send reasons to all shareholders on our choice to keep them satisfied considering that some may avoid questioning management but they are not satisfied. 'Grow With Me' Doll Line was also questioned if it was ethical idea to adopt since the payback period was greater than 10 years with no exact time to payback the fund invested. Therefore, shareholders questioned the move since they saw the move to be unethical as it was aimed to waste company’s funds. As CEO, I had to have troubleshooting technique to solve the issue and I developed a nice way to convince then by adding investment criterion on investment report to give in depth understanding on the financial analysis and decision-making. Reference Arnold, G. (2007). Essentials of Corporate Financial Management. London: Pearson Education.Ltd. Jensen, Michael and William Meckling. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics. Rajan, R. and L. 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