Investment Proposals, Essay Example

It is difficult to pick a project out of the three given projects because they all refer to different aspects of the firm. The first deals with labor, and how costs may be cut in this area. By cutting labor costs and investing in equipment which can allow for this to happen, the company can gain more revenue. The next refers to a new marketing program which will increase sales. This program does come with a cost, however the increase in sales is promised to be over the next three years, and a continuing flow after that. The last is the launching of a new product; this would require much investment as well, and the product promises, or is expected to sell at a volume of 10,000/units a year for the next three years. It is difficult to pick a project, with the company constrained at an overall cost capital of 15%. Also, the projects refer to different fields and promise different things, all amounting to different amounts. It has to be calculated out of the three which is the least risky, and which will promise more revenue over the next few years. So, far, the labor saving equipment promises cost-cutting for the next three years, however does not promise an increase in sales.

The first project refers to a method of capital budgeting which is known as a cost-benefit analysis. This includes an issue which is other than cash, and it is a way to save money by focusing on things such as time saving; in this case, it is labor cost-cutting (Dayananda, et. al., 2000). The next project which is a marketing program, costing at around $1,000,000, is expected to increase sales of $10,000,000/year by 20%, this is over a period of three years, and is known as a payback period (Dayananda, et. al., 2000). This is because the cost of return in the investment is measured. The last project is a method of capital budgeting which is the modified internal rate of return, this makes assumptions about investments of cash flows (Dayananda, et. al., 2000). This is seen in how the projected new product launch will sell at a certain price, for a certain number of years at a certain volume per year. Also, it keeps in mind the contribution margin, keeping track of the actual cash flow.

The negative aspects of the first project are that there is only money being saved, no money being gained. This may be a good factor in the manufacturing industry, however cost-cutting does not mean that revenues will increase; and it should always be the goal of an organization to maximize the growth in revenue. The new marketing program seems to be promising. However, the investment cost seems heavy and it only increases current sales and does not promise new ones as well. Also, there is a time limit on the amount of sales as well as their increase; this is seen only in three years. The launch of a new product is always risky. There are many factors to consider before jumping to this option, and one has to be certain that the product will definitely sell. A lot of research and market studies are required before doing so, and this might also increase the proposed investment capital cost.

Though risky, the first project seems more promising. This is because it is the only one which promises new sales and revenue.

The discount rate is the rate of return on an investment; in the case of the new product launch, the discount rate is seen as $600,000/year.

If the discount rate is seen as too low, the rate of costs in the future might be seen as much more than they are worth, and the buyers will not be getting anything better from the product or the service (Khan, 1993). This is seen common nowadays because of given investments; it is not common to hear of discount rates being too low.

References

Dayananda, D., Irons, R., Harrison, S., Herbohn, R. & Rowland, P. (2000). Capital Budgeting: Financial Appraisal of Investment Projects. Cambridge, England: Cambridge University Press.

Khan, M.Y. (1993). Theory & Problems in Financial Management. Boston: McGraw Hill Higher Education.