Managerial Economics Decision: Long-Term Investment Decisions - Case Study Example

LONG-TERM INVESTMENT DECISIONS TABLE OF CONTENT 0. 3 Introduction 4 2. Selectingpricing strategies 4 3. Effects of government policies on production and employment 5 4. Is government regulation needed? 6 5. Complexities arising due to expansion via capital projects 7 6. Solving the agency problem 8 7. Conclusion 10 8. Reference 11 0. Abstract The paper intends to explain the long term capital investments decision undertaken by a company facing increased cost of production. It also seek to explain how such a company can make use of various product pricing strategies and be able to maintain its market share despite the need to raise products price. The paper also discusses how government policies and regulations affect business operations and their effect on investments decisions. The paper tries to explain reasons why government regulation is needed in the low-calorie frozen, microwavable food industry. In the paper are proposals on how to solve the agency problem. 1. Introduction Capital budgeting is a process used to evaluate and rank potential expenditures or an investment project. The decision of whether to accept or deny an investment project as part of a companys growth initiatives, involves determining the investment rate of return that such a project will generate (Maccarrone, 1996). The acceptable rate of return is influenced by factors specific to the company as well as the project. Capital budgeting seeks t make sure there is accountability and measurability in business investments decisions. Capital budgeting explains the present value of the future investment, or how long it will take for the investment to give returns. Businesses that lack effective capital budgeting process will have little chance of surviving in the competitive marketplace (Bialowolski & Weziak, 2004). 2. Selecting pricing strategies The price elasticity of demand establishes the sensitivity of quantity demanded due to a change in unit price. It exactly measures how to tells how much the quantity demanded changes as a result of a change in the price (Vazquez, 1998). The management of the low-calorie frozen, microwavable food company should seek to implement pricing strategies that makes their products response to a change in price less elastic, meaning that, the product demanded will not be very responsive to a change in price. Product pricing forms an essential part of an organisations marketing strategies. The management of the low-calorie, frozen microwaveable food company need to consider various factors when setting up their prices even while anticipating to increase the price in future. The law of demand dictate that, any increase in the prices will produce corresponding decrease in the demand of the product. Without taking necessary measures, the company will run the risk of losing revenue when they increase prices since it will result in a decrease in demand (Che, 2003). The management of the low-calorie frozen, microwavable food company should start by evaluating the actual cost of production. Then they should try to cut down variable cost of production. This will facilitate setting a relatively lower price to enable their product penetrates the market. After the products have gained a substantive market share then it will be possible to increase the prices. Ensuring that the product are of high quality products will attract high end customer whose demand is not very sensitive to changes in price.( Gherasim, 2012). The manager should seek ways of developing customer loyalty to the brand. Brand loyalty decreases the product responsiveness to changes in price hence reducing the price elasticity of demand. This can be in the in the form of keeping in touch with the target market on a frequent and consistent basis (Trif, 2013). Letting them know about the new and exciting developments within the company and what to expect next. Communicating with customers helps in build momentum relationship that makes customers to feel involved in the happenings of the business. Soliciting for feedback from customers can also help to strengthen brand loyalty (Jensen & Hansen, 2006). 3. Effects government policies have on production and employment Government economic policy and market regulations have an influence on the competitiveness and profitability of businesses. Businesses have no other choice when it comes to comply with the regulations established by the government, both municipal and national. Governments establishes regulations which all the time affects the behaviour of the business operations. Fiscal policy will always have an effect on how much a business is willing to take takes. Government policies that affect business operation include include imposition of taxes. Businesses will always experience different types of taxes. Corporation taxes are tied on the profit reported by a business during in the course of a taxable period. High rates of corporation taxes discourage investment since it reduces the amount retained to reinvest. Also it reduces investors riskiness hence making them shy away. On the other, low rates of corporation tax serves to free up funds for investment in facilities and merchandise selection (Surrey, 1975). Government tax allowances will encourage more investment in business opportunities because it boosts research and development. If a government introduces tax credits for investing in business expansion, the result will be more investment (Man, 2002).Tax incentives introduced for hiring and training employees make businesses feels confident in hiring extra workers or opening new locations (Worawisutsarakul, 2000). Income tax charged on the income of individual citizen employee has the effect on the disposable their incomes it has an effect on the aggregate demand and consumption (Survey of Business, 1996). The cost of borrowing is always affected by the prevailing rates of interests. High interest makes the cost borrowing go up and this discourages investments hence low employment of factors of production. Investments rate always tend to be high under low interest rates regime. Long production processes becomes profitable, as funding for them has now becomes available and this results into more consumption and employment in future (Tom & Bary, 1989). Labour laws, regulations and policies all imposed by governments affect the labour market. The government, through policies sets minimum wages which in turn affects the overall profitability of businesses. They also have an effect on the consumer’s disposable income. This consequently affects their disposable income which affects aggregate demand of products and services (Dougherty, 2008). 4. Is government regulation needed? It is argued by free market economist that government intervention in businesses should be limited. Their reason against this argument being, government intervention causes an inefficient allocation of factors of production. Through macroeconomic intervention government can overcome prolonged recessions and reduce unemployment (Udorescu & Zaharia, 2008). Government regulation is necessary since crook exists in many industries. Regulation serves to protect businesses from unfair business practises by their peers. Government intervention is needed to ensure fairness in the low-calorie, frozen microwavable food industry. This will go a long way in ensuring that players comply with the industries best practises. This is necessitated by the fact that this company operates in the food industry which is very sensitive industry (Taylor & Chang, 1995). The government has regulated other sector of the food and drinks industries. In United States of America, the Food and Drugs Administration ensures the safety of the nations food supply. The federal government of the United States of America also regulates soft drinks industry is also regulated by the Food and Drug Administration (Hutt, 1993). 5. Complexities arising due to expansion via capital projects Most successful business start-ups, especially small enterprises face the problem of dealing with planned expansion and growth. When not carefully handled, business expansion can lead to losses that can negatively affect the future operations of a business undertaking. More funding are usually require by businesses experiencing growth. This makes it necessary for the owner, to seek funds from individual investors or institutional lenders. Getting capital to expand operations can be a frustrating experience for business owner does not plan well, but at the same time it can be less painful for those who plan ahead. To be able to secure funding under the most appropriate terms, businesses should seek to revise their business plans and update their marketing strategies on an annual basis. While sourcing for funding, businesses should consider the cost of the credit to ensure economic viability of the expansion. The expected rate of return should exceed the cost of credit rate to ensure the economic viability of the expansion (Mendlick, 1993). All organisations that are expanding have to recruit new employees who can help the business deal with demands associated with increased production, new sales and marketing campaigns and administrative requirements. The new employees hired will look up to the managers of the organisation for leadership and mentorship. Manager should practise careful while recruiting new employee especially during periods of expansion. Most of the time companies overlook employment plans and concentrate on production and marketing. Expanding companies should have workable strategies to deal with all their production and marketing need and human resources issue (Editors, 2001) Ambitious and talented entrepreneurs who can build thriving business that meets strong demand for a specific set of goods and service faces the problem posed by fast expansion. Success is good thing for the business, but rapid expansion and growth can sometimes overwhelm the owners of a business. Controlling growth in business and the problems that come along with expansion with it can be a hard task for an entrepreneur. This is because it affects much aspect of the business operations. Demand for a product can sometimes outpace production capacity. This presents the businesses owners and managers to offering franchise ownership to other business entities. Establishment of business agreements with distributorships and dealership can also help handle growth (Polo-Redondo et. el., 2011). Most of the time, when a business grows there is a corresponding increase in the wealth of the owner and the employees also. Growth in validates the initial plan or idea. Appropriate research coupled with effective planning help problems often associated with a business which is expanding at a high rate. 6. Solving the agency problem Stockholder being the owner delegate the responsibility of the day-to-day decision making authority to the manager of the business. A conflict of interest known as the agency problem is seen between the owners and the management of a business. The management are required to act in the best interest for the shareholder who is the owners of the company. Decisions made by the management should serve the best interests of the stockholders. This is not always the case, sometimes they are motivated self-interest. Sometimes the managements (the agents) best interests may differ from those of the stockholders. This presents a case of agency problem, the "principal–agent problem" (Miles, 2004). Agency conflicts are minimal if the total pay packages of the manager is linked the overall market value of the companys stock price. Both managements wealth and that of shareholders increases when the value of the company increases. However, there exist factors beyond the management control that affects the price of shares of a company. Existence of such factor negatively affects the application of such a scheme (Miles, 2004) Managerial decisions and actions are intertwined with multiple stakeholder interests (including those of shareholder) in such a way that breaking the management interests apart from the stakeholders is not possible. Managers who make decisions in isolation of the multitude of stakeholders and focus singly on shareholders overlook important threats to their own well being as well as opportunities on which they might capitalize on for the benefit of the business (Miles, 2004). To deal with the the agency problem, an executive compensation program can be designed to ensure that the long-term interests executive management and the shareowners are aligned. The main objective of such a scheme should be the long term interests of shareowners. This can be achieved with a compensation plan that rewards executive management for good financial performance by the company (Miles, 2004). Its is not possible to do away with the agency problem completely, but the management can be motivated to act in the shareholders best interests using incentives such as direct influence by the shareholders on the operation of the company, the threat of firing managers who act on their own interests and the threat of takeovers. Research shows that, the most important method used to overcome the agency problem is performance-based scheme, bonus schemes and external audits (Miles, 2004). 7. Conclusion To conclude, any company or organization that wishes to carry an expansion plan avoid the risk of undertaking an expansion only to be faced with problems of dealing with excess production. These companies need to do lots of extensive research and planning. The research will enable them to understand the dynamics of the ever changing business industry. The management of expanding company wills needs to understand the dynamics of the industry demand so as to plan an expansion that involves diversification. An understanding of the prevailing government policies in the chosen field of expansion will necessary also. Organisations need to be ready to tackle all the challenges associated with expansion. For those seeking external lines of credit, research need to done on the best credit term available in the so as to make sure that the cost of capital to be employed favourable. Shareholders need to come up with ways of motivating the management to foster a convergence of interest in an effort to minimize and put in control the agency problem. 8. References Bialowolski, P., & Weziak-Bialowolska, D. (2014). External factors affecting investment decisions of companies. Economics, 8(11), 0_1,1-21A. Retrieved from http://search.proquest.com/docview/1509435668?accountid=45049 Che, H. (2003). 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