- March 11, 2013
- Posted by: essay
- Category: Term paper writing
The goal of the paper is to analyze a managerial decision related to generating addition business profit. Three investment opportunities are considered in the Definition section, and the issues which might affect the investment decision-making are considered in the Factors or Costs section. Using certain suggestions regarding the investment opportunities (described in the Measurement section), the investment opportunities are evaluated using such methods as payback period, net present value and internal rate of return. The implications of the analysis associated with the changes of factors involved in the decision-making are considered in the Summary section. The Conclusions and Recommendations section presents the analysis of the best decision and recommendations on the changes which might improve the learning process.
Research question of this paper is: What is the best long-term opportunity to invest the additional business profit: to place the savings into a fund, to invest into real estate or to support an agricultural project?. The answer is to support an agricultural project (option 3). The answer was determined on the basis of assumptions made in the Factors or Costs, and Measurement section. Financial methods of evaluating the investments such as NPV, IRR and payback period were used to analyze the effectiveness of three investment opportunities. Option 3 appeared to be the most effective since it generates increasing profits every year, yields a higher NPV and is less vulnerable to the changes of minimal return rate compared to other projects. This analysis can be highly useful for the investors willing to get maximal return on their savings during a given period (10 years, in the considered case). The choice between the opportunities is not obvious, and the analysis performed in this paper, as well as the consideration of implicit and explicit factors affecting the decision, are of great importance to potential investors.
The purpose of this paper is to analyze a quantitative managerial (economic) problem regarding investment issues. The research question is the following: What is the best long-term opportunity to invest the additional business profit: to place the savings into a fund, to invest into real estate or to support an agricultural project? The details of the investment options are the following:
a) the fund promises to give back a given percentage of the invested sum every year and after a given period of time, the initial investment will be returned to the company (conditions similar to bank deposit)
b) the savings can be invested to purchase houses or apartments, which can then be rented during the expected period of time; for the purpose of comparability of the investments, it is supposed that the apartments will be sold after a given period of time
c) it is possible to invest the savings into an agricultural project apple orchard which is not expected to generate any profit during first two years, but will then produce a linear increase in revenue during a given period of time. After this period of time, the orchard will have lower commercial value, and thus will be sold.
Managerial decision-making often involves analysis of complex opportunities including both explicit and implicit costs. It is the manager’s responsibility to analyze all possible factors which might affect the situation at the current moment and in future, to determine the factors relevant to the problem and to quantify both explicit and implicit costs in order to determine the true economic costs of a financial or investment decision (Sexton, 2010). In general, explicit costs include all direct payments (where actual payment took place or will take place), and implicit costs represent the opportunity costs, i.e. the costs of alternatives which had to be given up instead of the current opportunity (Carbaugh, 2010).
In this paper, the analysis of investment decisions is performed with taking into account both explicit and implicit costs. First, the most important factors are chosen for constructing the financial model, which is further analyzed using three financial methods (NPV, IRR, payback period). Secondly, the sensitivity of the model to the changes of critical factors is considered. Finally, the recommendations for managerial decision-making are provided for the most probable situations and changes of the considered factors. The hypothesis is that the most profitable option will be Option 3, since it generates growing cash flows (although this project is associated with greater risks).