STEELBEAM PLC



Stealbeam plc - Investment Decisions



INTRODUCTION1

DECISION ON ENTERING THE MARKET1

RECOMMENDATIONS FOR COMPONENTS:1

1.Profitablity3

2.Break-Even Analysis4

3.Weighted Average Cost of Capital4

4.Benefit-Cost Ratio (Profitability Index)5

5.Net Present Value and Expected Net Present Value5

ANALYSIS OF INVESTMENT APPRASIL AND DECISION7

CRITICAL ANALYSIS ON FINANCIAL TECHNIQUES USED8

WIDER BUSINESS ISSUES IMPACTING ON THE DECISION10

CONCLUSION12

REFERENCES13

BIBLOGRAPHY15

Stealbeam plc - Investment decisions

Introduction

Competition in the current era has been increased which leads companies to diversify their invetsmnets. Considering this factor, companies has been either expanding their current operations or entering into the new markets for better future outcome. Hence, in this section analysis have been carried out in order to determine whether new product investment is profitable. This analysis will be conducted through different Investment Techniques i.e. Net Present Value, Profitability Index and Expected Net Present Value along with Break-Even Analysis.

Decision on Entering the Market

The investment decision of entering the niche market in the European Commission is an important one for Steelbeam plc. Not only does it allow Stealbeam to take the advantage of entering into the niche market, but it also helps to expand its existing operations ceasing new investment opportunities. Niche markets provide an positive opportunity to businesses that are forced to compete against the scale economies that only larger competitors are able to achieve.

However the choice to pursue a niche marketing strategy will not guarantee success and the investment decision requires critical evaluation. This should be noted that feasibility is not the only factor on the basis of which investment decision should be made, rather there are certain other factors as well that needs to be considered. The essential elements include knowing the potential customers and meeting the markets unique needs through expertise in specification of high value steel construction (Pike, Neale, 2012, p.77).

Recommendations for components:

The forecast European market demand and selling prices in the “Superlite” Market Segment sourced from external market research shows that the annual demand in the market from a pessimist, most likely and an optimistic view. Recommendations upon the unit manufacturing capacity are evaluated through the technique of Profitability, Breakeven analysis, Benefit cost index (Profitability index) and Net Present Value. Sensitivity of the Net present value to the demand is considered theoretically. A conclusion is based upon all the techniques applied. Non financial factors affecting the decision are also taken into consideration (Pogue, 2012, p. 25).Profitablity

Profitability

Marketing Option 1:

 

 

Pessimist

Most Likely

Optimistic

Expenditure - Capital Cost ( upto 1000 units)

-£3,000,000

 

Expenditure - Capital Cost ( > 1000 units)

-£10,000,000

 

Marketing

-£1,000,000



 

 

Market obtained(units)



£800

£1,300

£1,600

Selling Price



£10,000

£13,000

£11,000

Variable costs(upto 1000 units)



-£6,400,000

 

Profits



1.6m

7.15m

5.6m

 

 

Marketing Option 2

Expenditure - Capital Cost ( > 1000 units)

-£10,000,000

 

Marketing

-£2,000,000



Market obtained(units)



£1,200

£1,950

£2,400

Selling Price



£10,000

£13,000

£11,000

Variable costs(upto 1000 units)



Variable costs( > than 1000 units)



-£9,000,000

-£14,625,000

-£18,000,000

Profits



3m

10.7m

8.4m

Break-Even Analysis

Break-even quantity (BEQ) (> 1000 units)

 

BEQ= ( Fixed Cost/ Average Price- Variable Costs)

 

= (1,000,000/ 11333-7500)

= 261 units

Weighted Average Cost of Capital

Weighted Average Cost of Capital( WACC)

 

 

Proportion of Equity (E)

60%

Proportion of Debt (D)

40%

Post- tax cost of debt( kd)

6%

Cost of Equity (ke)

14%

WACC = ke *(E/ E + D) + kd* (D/ E+D)

 

= 14% * (60%/100%) + 6% ( 40%/100%)

 

= ...