Capital Investment Appraisal Methods in International Business Finance - Assignment Example

of project: International Business – Analysis of Case Study and number: submitted: 1) Evaluate the proposed joint venture using financial and non-financial analysis. Clearly state which capital investment appraisal method you have used and it appropriateness. The cost of capital is of utmost importance so as to analyze the options that are available to the company. The cost of capital shall be ascertaining that how much the capital cost and thus whether the investment is providing more than the cost of capital then the decision is viable. In order to calculate the cost of capital the weighted average cost of capital is calculated based upon the weights of debt and equity. Value of Equity 13 m Value of Debt 7 m Total value 20 m Weight of debt (7/20) 35% Weight of equity (13/20) 65% Cost of debt 7% Cost of Equity 12% Using the following formula the weighted average cost of capital is calculated: WACC = (weight of debt x cost of debt) + (weight of equity x cost of equity) WACC = (35% x 7) + (65% x 12) WACC = 10.25% The weighted average cost of capital elaborates that the company shall be incurring the cost of 10.25% upon the arranged finance whether through equity or through debt. Thus in order to evaluate the investment for the purpose of accepting or rejecting it is to be ascertained whether the proposed investment is able to provide more return then WACC. When the proposed investment provides more return than WACC then the investment is viable and feasible and should be accepted. The evaluation of the proposed investment is done by ascertaining the Net Present Value of the cash flows so as to determine whether the return from the investment is feasible enough to accept it or not. The first year cash flow is calculated in Euros by converting the currency using the spot rate as follows: The net present value of the strategic option 1 is calculated. The cash flows are calculated in the terms of euros. The revenues are increased according to the incremental rate of 15% per year. The following table shows the calculation of net present value of the investment. Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Revenue 1,435,077 1,650,339 1,897,890 2,182,573 Operational Cost -209,200 -214,430 -219,791 -225,286 Depreciation -25,800 -25,800 -25,800 -25,800 Profits before tax - 1,200,077 1,410,109 1,652,299 1,931,488 Tax @ 29% -348,022.41 -408,931.58 -479,166.70 -560,131.42 Net Cash Flow - 852,055 1,001,177 1,173,132 1,371,356 Share of company 426,027 500,589 586,566 685,678 Investment -1,200,000 -800,000 - - - Total Cash flow -1,200,000 -373,973 500,589 586,566 685,678 Discount factor 10.25% 1.00000 0.90703 0.82457 0.74622 0.67684 Discounted Cash Flows -1,200,000 -339,204 412,771 437,705 464,094 NPV -224,635 Taking the profits of the venture for the four years does the calculation of NPV. Depreciation shall remain the same throughout the years and the other operational costs are raised by 2.5%, which is the inflation rate in the economy. The total profits are then accumulated upon which taxation is applied so as to determine the after tax cash flows of the investment proposal. The after tax cash flows are then the 50% that is the share of the company is ascertained. The investment of total 4 million is required out of which the company shall be investing 2 million. The investment strategy shall be that the company shall be investing 60% in the year 0 and the remaining 40% in the next year. Deducting the investment amount from the profits after tax concludes the total cash inflow and outflow from the four years. The part of share of the company is 50% and thus the cash flow of the venture after tax is taken 50% and subtracted from the cash flows. The discounting factor for the company is used as WACC. The usage of WACC as the discount factor determines that whether the venture shall be able to provide positive value for the company as when the company shall be investing in the venture. The discounted cash flow shall be providing positive net present value so as to cover the cost of investment for the company. The project is providing negative cash flow. The cost of investment for the company is more than return that the project shall be providing to the company and thus the negative net present value is calculated when the discount factor is considered as weighted average cost of capital. Along with the financial analysis the company needed to consider the non-financial aspects of investing in the venture. The company is taking the hold in the investment as just only 50%, which means that the other company shall be getting the equal say, and control in the operation of the venture. The company shall be doing the venture in collaboration, which shall be considered as to the symmetry of the operational system along with the culture, and norms is required between both of the companies. The company shall consider the relationship with the other company so as to determine the strategic decisions. The financial analysis shows that the venture is not financially viable, as the company shall not be getting the required return from the project. The cost of investing in the proposal is more than what the project is project is providing in form of return. The relationship with the other company i.e. EMF Plc. should be considered by the company so as to decide on with the investment in the proposed project (Frank, 2008). The mutual acceptability of the operations of both the companies should be considered. The staffs of both the companies are to be working together in collaboration for the project. The motivational impacts upon the employees of both the companies shall be considered so as to determine the success of the project. The project is in another country and thus the company needed to consider the cultural impact that the company shall be facing as the company is needed to incorporate with the norms and culture of country. The company shall consider the nonfinancial and financial factors in the same context so as to decide for the investment. 2) Advise IFM Plc SMT on the key operational and strategic challenges that they face when considering re-domiciling the France parent company to Monaco. Advise on Key Operational Challenges to SMT As the IFM Plc parent company is situated in France and also operating in several countries of the world by incorporating various subsidiaries in Germany, United Kingdom, Austria and etc since many decades ago, therefore, SMT of the IFM Plc would certainly have to face some of the vital, demanding and tremendous challenges in the operational sector of the Company to accomplish successfully the restructuring phase of the parent Company from France to Monaco. Most essential, of all the other operational areas of the Company, would be the effective management of the ongoing daily operational and functional activities of the Company. As the permanent restructuring would highly impact the current clients dealings of the Company, vital client unclear or ongoing transactions, consultancy and financial advisory services already in progress with certain industrial or commercial clients of the Company and most importantly, above all, to monitor the effective transition of all business records and information from its parent Company office to the new office premises at Monaco. Furthermore, other stake holders of IFM Plc would also be directly affected from the restricting decision and SMT of the Company would definitely have to create a well organized channel or pathway to smartly transform and move all their business relationships, dealings and connections with their various stakeholders, including creditors, debtors, banks, related parties, associated companies, shareholders, and government authorities to its potential location at Monaco. This can be done effectively and in a timely manner, only, when substantial notice is given to each of the affected stakeholders and where necessary, conducting meeting with some of them to assure them that this restructuring phase will improve their ultimate relationship with the organization and then only, the Company would be in more strong position to provide them with more value added services at economical rates and charges. As the organizational restructure process is truly like a giant wave of the sea that can literally knocks down most of the stakeholders in the absolute path of the organization (Changedesigns.net, 2014). Advise on Key Strategic Challenges to SMT The measure challenges would be faced by SMT in the area of restructuring the centralized treasury management system of the parent Company from France to Monaco. Consequently, a new plan and design would have to be considered, developed and implemented right from the scratch again to put the foundation of new centralized treasury management system for the Company at Monaco. The terms and conditions needs to be negotiated with Banking channels and financial institutions at Monaco for affectively managing the Company Cash flows and other related cash and finance transactions of the Company. Moreover, the SMT would have to be actively involved in analyzing the political conditions and potential threats, if any, to which the Company would be directly inherent at Monaca after restructuring its head office operations. In addition, SMT would also need to evaluate diligently with respect to the implications of foreign government, i.e. Monaco, regulations and control that can directly affect the parent Company operations in Monaco. Above all, the Company would be required to carry and own some or few of its work force from France to Monaco for efficient transforming its restructuring cycle into the new location and therefore, it would also have to down sized some of its human capital as the Company could not bear the cost of transferring all the workforce to its new location and thus, only key employees would be considered for such transfers. Because, organization restructuring does in real terms directly influence the organization climate and most importantly, impacts the overall employee attitudes, perspective and experiences about the organization (Brand and Wilson, 2000). 3) Clearly state what options of sources of finance the multinational corporation has to fund the proposed expansion across Asia. What factors should the company consider when deciding what sources of finance to access to fund the restructuring of the company? Sources of Finance Availability As, IFM Plc is among one of the leading multinational Company of the world, as evident from its legal structure, as in, it constitutes many subsidiary companies scattered among the different countries of the world under its Consolidated Umbrella, therefore, the company international credit ratings and financial standing and potentials are far more established and stringent as compare to any other mediocre international business entity. Consequently, the Company would be in a much better and strong position to opt for its finance or fund requirements options, from among the various sources of funds available in the capital and financial market, both internationally and locally. Increasing Share Capital The most reliable and worthy option available at the discretion of SMT is to meet their fund creation requirement by inviting the money from the general public by way of issuing of further share capital into the stock market of the country. On the other hand, if it is not a public listed Company then the SMT may decide to opt for IPO (Initial Public Offering) option to raise the capital in order to meet their fund requirements for the Company expansion across the boundaries of Asia. This is the most effective mean to generate finance and it does not possess any extra cost. Long term Loans Another option available at the discretion of the SMT of IFM Plc, to meet their financial needs for business expansion, is to acquire a long term loans from any banking or financial institutional channels. As, the company credit standing and financial position is quite strong enough to acknowledge the timely repayment of the loan principal and interest cost, thus, SMT could easily negotiate a loan and its terms from any well reputed financial institutions or banking channels. Disposal of any business segment or subsidiary This option might result in huge cash inflows to IFM Plc, if considered to take into action. However, the disposal of any of its non profitable or loss incurring business segments or subsidiary would inject some of the cash flows towards the SMT of the Company, which then strategically utilized to meet business expansion and growth requirements of the Company in an effective and efficient manner. Crowd Funding Crowd funding is another option for the organization, which allow the raising of funds or capital by using various online and active social media channels or networks to gather a huge number of people which can contribute finance towards the organization for any particular project financing and setting up and that all is done by those peoples in exchange for a consideration involving goods, services or share in the equity instrument of the Company. But, Crowd funding would be effective for IFM Plc if they have some strong and established business and social networks and contacts and those channels wanted to build further loyalty and trust in favor of the business (Business.vic.gov.au, 2014). Joint Venture Contract Another vital and reliable option for raising finance for the business expansion of IFM Plc across the Asia is to sign or enter into a joint venture relationship with some other financial sound and competent organization. But the SMT should make sure before signing the contract that, the existing business of such potential joint venture partner should prove to be a source of assistance and synergy for IFM Plc business operations. As a result, substantial fund requirements would be raised from the venture business partner of the organization on very relax and easy terms but on the other hand, the organization needs to offer a particular share of interest to such business partner in the future profits and revenues of the organization. Factors to Considered for selection of particular fund raising option It is quite clear and justified that the whole and sole requirement for the effective business expansion for IFM Plc would be to arrange that source of finance channel and pathway that could remit or lent funds to the organization at the most relaxed terms and conditions with least cost of payment for such funds received. The Company should opt for those banking channels, if deciding to acquire a long term loans that are internationally operated and provide a favorable room to IFM Plc for any exchange rate translations issues arising on the loan transaction. Another, factors which should be given due consideration by SMT is on the cost of the loan acquired and its repayment schedule. The repayment schedule must be negotiated in way from the financial institution that the Company does not have to face any extra burden in shape of interest cost during the time of its early stage of business growth at new location, i.e. after shifting its parent premises to Monaco. The SMT should also consult and analyze any regulatory factors impacting their choice of sources of funds for restructuring in Monaco, like, any stringent requirement of extra interest costs, restriction on issuing of share capital internationally, issues in disposal of any business segment of IFM Plc and in contracting for any joint venture agreements with foreign partners of the organization. Thus, Businesses grow in cycles and phases with the economy globally and regular Business downturns are very inevitable leading to periods of financial stress on corporate human and capital resources, and as a result of these major financial strain, it is quite imperative for the companies to restructure their financial framework, operational procedures and methodologies and modes of organizational climate and behaviors so as to remain viable and standstill in the international market place of the world (Granitefinancialadvisors.com, 2014). References  Brand, H. (. E. and Wilson, J. 2000. The impact of organisational restructuring on organisation climate and employee attitudes. Available at: http://repository.up.ac.za/handle/2263/11603 [Accessed: 14 Apr 2014]. Business.vic.gov.au. 2014. Sources of finance: business angels, shares and more | Business Victoria. [online] Available at: http://www.business.vic.gov.au/money-profit-and-accounting/raising-funds-for-your-business/sources-of-finance [Accessed: 14 Apr 2014]. Changedesigns.net. 2014. Restructuring organizations leadership problems. [online] Available at: http://www.changedesigns.net/public/team/leading_teams/Leadership-after-an-organizational-restructure.html [Accessed: 14 Apr 2014]. Granitefinancialadvisors.com. 2014. Financial Restructuring Advisory. [online] Available at: http://www.granitefinancialadvisors.com/services/financial-restructuring-advisory [Accessed: 14 Apr 2014]. Frank, L., 2008. Research in applying the financial appraisal profile model to an information communication technology project within a professional association. International Journal of Managing Projects in Business, 1(2), pp. 233 - 259. Read More