MANUFACTURING FACILITY

New Manufacturing Facility in Ruritania

New Manufacturing Facility in Ruritania

Abstract

This report highlights the important aspects of finance related to setting up a new manufacturing facility in Ruritania. This paper will cover the pros and cons of setting up a new project and its impact on the financial position and growth of organization.

Introduction

Company is looking forward to launch a manufacturing facility in Ruritania. Ruritania is a fictitious country. It is assumed that Ruritania is a politically stable, economically developing Eastern European country. Last year, the annual growth rate was 3.2% and the rate of price inflation has averaged 5.2% per annum over the last year or so. Ruritania does not have a long tradition of democracy, the present Government has been democratically elected and new elections are due in Ruritania in approximately nine months' time. There are two major political parties in Ruritania and recent opinion polls suggest that the present Government enjoys a 7% lead over the other major party. This opinion poll lead has remained reasonably stable for the last eight months. The other major party is also committed to democratic principles and a market based economy although, if elected, it is likely that they would increase both corporate and personal taxation to provide additional funding for their proposed social expenditure.

The Crown (the currency of Ruritania) traditionally had a centrally managed exchange rate, but the Ruritanian Government allowed the Crown to float freely about four years ago. This, initially, resulted in a fairly large drop in the value of the Crown, but the Crown has enjoyed reasonable stability against major international currencies during the past eighteen months. There has been persistent press speculation that the present Government will peg the Crown against a major international currency within the next few months.

Keeping in view the above mentioned assumptions, the following concerns and issues can be drawn:

Financial Aspects

The financial aspects for this new venture are highlighted below:

Economic Conditions

It is observed that the economic conditions of Ruritania are good and with the perspective of economic conditions there is no harm is setting up a new manufacturing facility in Ruritania. The GDP rate and the inflation rates are normal and there are no chances of bankruptcy of the state. The currency has stability against major international currencies during the past eighteen months and it is predicted to be more stable in upcoming days. Ruritania is also expected to be the member of European Union till 2014.

Political Factors

The state is politically stable and the government and opposition are in support of democracy. The election is expected in the next 9 months. It is suggested that the company should hold investment till the elections to observe the political conditions of the state after the elections.

Profit

Profit is basically defined as revenue minus costs (Victor et al., 2002). It is the difference between how much the business gets from selling its product and the amount it spent. A new manufacturing facility in Ruritania is being under consideration due to cheap labour costs which will make the company more ...