Finance for manager - Essay Example

In the initial three (3) year period the market will be restricted to only a few suppliers but this will change thereafter as the market will be opened to other suppliers. This means that care should be taken to ensure that the company does not invest in too large a capacity which may not be necessary later. There are two options available to Steelbeam. The company can either choose option 1 – which involves investing in capital with a limited capacity to produce a maximum of 1,000 units (small capacity) or option 2 with the capacity to produce a maximum of 4,000 units (large capacity).

These alternatives have different variable cost per unit with the large capacity project having the lowest variable cost per unit and the small capacity project the highest variable cost. In assessing the two options the company has to pay attention to the contribution that both projects make to fixed cost as well as the break even point in units. Additionally, every capital budgeting decision requires the use of capital budgeting techniques in order to make a determination of which option is more advantageous to the company.

The techniques available to your company include: ENPV is calculated using the figures obtained from the pessimistic, most likely and optimistic market forecast while applying the formula used in project evaluation and review technique (PERT). This technique assumes that the estimates of sales and demand activity follow a probability distribution (See Heizer and Render 2006). The expected sales and demand are found through the application of weights to the three estimates in each case – of demand and sales, as follows: The information arrived at from the computations suggests that the expected annual demand is 6,333 units and the expected selling price per unit - £12,167.

These figures can be used to determine which option is better for Steelbeam PLC. Each option will be assessed to determine its