General considerations when investing in a project/ product Flashcards
Which option consumes more initial capital?
eg It seems as if the investment
in option 1 may require more (about 10%) capital but is sensitive to
exchange rate movements
payback period
eg .Option 1 is less risky as the payback period is earlier whereas option 2
cash inflows are concentrated to later periods
higher IRR
Option 2 has a higher IRR, and that would suggest it should be chosen
from a purely financial perspective. This needs to be compared to the cost
of capital.
Alternative considerations
Are there alternative investment options that have not been considered?
Perhaps shareholders would prefer a return of capital (e.g. by means of a
dividend).
sufficient cash to make both investments
When one considers that the net assets are worth R 22.8 million (at 30%)
or R19 million (at 25%), it seems we are overpaying for the investment, is
the goodwill really that much?
Culture clash
Eatwell’s directors and SunFood’s directors may clash in terms of
organisational culture and may not agree on key decisions.
There may be potential tax leakages etc
Conclusion:
Based on the above, I would recommend Sun Food undertakes the
investment in Eatwell, assuming it can only undertake one investment.
Frame work
Creating a comprehensive framework to evaluate investment options
financial, strategic, and operational considerations
Financial Analysis
Return on Investment (ROI): Calculate and compare the expected ROI for each investment option.
Payback Period: Determine how long it will take for the investment to pay back its initial cost.
Net Present Value (NPV): Evaluate the present value of future cash flows from the investment.
Internal Rate of Return (IRR): Assess the profitability of the potential investments.
Break-even Analysis: Identify when the investment will start generating profit.
Liquidity Considerations: Consider the impact of the investment on the company’s cash flow and liquidity.
Risk Assessment: Analyze financial risks, such as market volatility and credit risks.
Capital Structure Impact: Examine how the investment will affect the company’s debt-to-equity ratio.
Strategic Alignment
Core Business Synergy: Ensure the investment aligns with and supports the core business activities.
Long-term Strategic Goals: Align the investment with the company’s long-term objectives.
Competitive Advantage: Evaluate whether the investment will provide a competitive edge in the market.
Market Expansion: Consider if the investment allows access to new markets or customer segments.
Innovation and Technology: Assess the role of technological advancement and innovation in the investment.
Strategic alignment
refers to the practice of ensuring that all elements of a business’s operations, including its goals, strategies, resources, and actions, are coordinated and directed towards achieving the overarching objectives of the organization
Key Aspects of Strategic Alignment
Alignment with Vision and Mission:
Business Objectives:
Operational Tactics:
Day-to-Day Operations
Resource Allocation
Organizational Structure
Structure and Strategy
Cultural Alignment:
External Alignment
Market Trends
Stakeholder Expectations
Technology and Innovation:
Adaptive Technologies
