Proposal A is accepted over the other proposals due to the net present value estimated. Its net present value is the highest amongst the other two and is expected to add value to the business and regain total market share in the near future for the corporation. In acceptance of this proposal, the other proposals are automatically discarded because they are mutually exclusive.
Problem statement Burgan Computers, Inc. (BC) successfully introduced the EzyGo device 5 years ago. Currently, the company is facing issues which include competitors launching several different versions of smart phones which have new features that the EzyGo does not.In contrast, the EzyGo is only able to upload and download with a computer by BC. The second issue is that major software developers are supporting BC’s competitors in the market at the corporation’s expense. Consequently, the corporation is being challenged with fierce competition and decline in the market shares. An updated report has shown the sales volume of EzyGo last year was approximately 20,000 cells, only representing 20% of the market. Its market share had been declining 0.
5% on average each quarter for the past two years due to the issues described above.This trend is predicted to continue for at least a couple of years. Objective statement & Assumptions BC’s top management holds a vision of, “a bright future for technology integration which aims to create a new generation of multi-functional personal appliances. ” Our ultimate aim is to add value to the business and regain total market share in the near future for the corporation.
As the company is being faced with the issues described above, it needs to evaluate projects which will best tackle the issue. This will be carried out using net present value calculations. Assumptions are necessary for the evaluation of the proposals.The sales figure is derived using the previous year’s sales figure. Because the EzyGo smart phone was launched and the existing factory in Western Australia was established 5 years ago, this analysis is assuming that the old manufacturing equipment was purchased 5 years ago. The trend speculation of decline in forecasted market share is assumed to be only applicable for 2years. The production capacity is assumed to be infinite for the purposes of this analysis. The proposals are mutually exclusive one another.
Decision & Recommendations BC should select to implement proposal A and reallocate of its manufacturing facilities to China.Its net present value is positive and is the best alternative to undertake and achieve our objectives..
The net present value (NPV) of this proposal A is $84,980,219. This value is deprived after the compenstation for the initial outlay and the risk placed on it. Refer to Appendix 1. 1 and 1. 5. This is the highest net present value against the other two proposals refer to appendix 1.
2 and 1. 3. Because the other proposals also have a positive net present value, the highest net present value should be selected for a greater increase in shareholder wealth.Intangible factors will bring about subjectivity in project evaluations as there the values and costs are only estimates and are subject to error.
An intangible issue is that the market is not certain. In the forecasted that market demand will grow at 5% p. a. Although this isn’t included in the project evaluation because it’s not an incremental factor, it may affect the company’s implementation of the chosen project. For example, if market demand increases, then the sales volume would potentially increase too.
Refer to Appendix 1. 6. A primary issue is agency costs within the corporation.Because managers and shareholders do not possess the same objective set, this may influence the prevailing proposal. It may be for unethical purposes – that is, to push income up or down. An inevitable issue is that in this ‘technological’ based market, new products will be produced and improved at a rapid pace; this will influence the corporation’s future market share.
The reputation and customer loyalty is another intangible factor that affects the proposals. Depreciation of the equipment is not included as there is no rate given. Although depreciation is not a cash flow, the tax implication on depreciation is.However, there are no given depreciation method or rate here which may have affected the decision in accepting proposal A.
Other factors may include employees performance and service that is reflected in the sales volume – their attitude towards the sale can influence the consumer’s behaviour and ultimately, affect the sales volume of the company. On this note, the corporation also needs to consider any implementation issues including employee tasks and financing options. The corporation could also consider leasing or renting non-current assets to use rather than purchasing it.
The ultimate goal is to gain returns that compensate for the risk that is encompassed when undertaking the proposal. In summary, in accepting proposal A, the company can work to achieve its goal in increasing its total market shares and adding value to the shareholders wealth. Because all of the projects are mutually exclusive, the selection of proposal A will automatically eliminate the other two proposals put before the company. Intangible factors may also influence the net present value of the company’s proposals – but more of them are inevitable risks which the company needs to sustain in order to achieve its goal.