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SOE11144 Global Business Economics And Finance
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SOE11144 Global Business Economics And Finance
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Course Code: SOE11144
University: Edinburgh Napier University
MyAssignmentHelp.com is not sponsored or endorsed by this college or university
Country: United Kingdom
Questions:
1. Whether the expansion should proceed, taking account of the risks involved, including risks relating to potential changes in costs and prices.2. How suitable performance targets can be developed for mining operations
Answer:
An introduction:
The aim of the assessment is to evaluate the expansion plan of a multinational mining Corporation by using adequate investment appraisal techniques. Furthermore, adequate evaluation needs to be conducted on whether the expansion process involves higher risk attributes, which can increase cost and prices for the overall organisation. Moreover, analysis is also conducted to identify the suitable performance targets that can be developed for the mining operations. The information provided by the organisation is evaluated for identifying methodology for the proposed investment and determine the reasonable conditions for accepting the project.
A methodology for evaluating the proposed investment:
The proposed investment opportunity of the major multinational mining corporation is evaluated with the help of adequate investment appraisal techniques (Brisley et al., 2016). These investment appraisal techniques evaluate the projects anticipated cash inflows and outflows to determine whether they have the capability to provide higher returns in the long run. Furthermore, the investment appraisal techniques allow organization to determine whether the investment scope has the potential to support current investments, which can yield higher income during the life of the project (Warren & Seal, 2018). The current project is related to 3 new coal mines, which are to be purchased for increasing their capability to generate higher cash inflow during the investment phase of 10 years. There are investment appraisal techniques such as Net Present Value, Internal Rate of Return, Payback Period, and Discounted Payback Period, which are used in evaluating the overall proposed investment project.
Net Present Value:
Investment appraisal technique net present value evaluates the projects overall cash outflow and inflow with the help of discounting rate to determine the financial viability of the investment (Baum & Crosby, 2014). The net present value of the project needs to be positive as it discounts the yearly net cash flow of the project at the time of the initial investment. This helps in determining whether the investment is viable and can project higher returns in comparison to the initial investment. This measure directly allows the organization to determine and select investment opportunities, which can increase the firm value in long run. The major component of this method is the discounting rate, which is determined by evaluating cost of capital of the organization (Li & Trutnevyte, 2017).
Internal Rate of Return:
The Internal rate of return directly allows the organization to determine the profitability potential of an investment. The derived value from the internal rate of return directly indicates that the project will have net present value of the cash flows at 0 levels. Hence, the organization needs to have higher returns than the internal rate of return value for successfully improving the level of income from the investment (Laird & Venables, 2017).
Payback Period:
The payback period calculation allows the organization to determine the minimum time that is required for acquiring the initial investment conducted in a project. In addition, with the help of payback period companies are able to understand whether the investment will directly provide the overall cash inflows to support the initial investment in the project. Furthermore, the finding of the overall payback period allows the organization to select the appropriate investment options, which can increase the return in the long run (Elmassri, Harris & Carter, 2016).
Discounted Payback Period:
The discounted payback period is calculated on the discounted cash flow, which allows the organization to identify capability of the project to return the initial capital by taking into consideration the time value of money. The discounted payback period is an effective tool, which can be used by the organization to determine the time frame until which the initial investment will be blocked by the project (Bennett & James, 2017).
An evaluation of the proposed investment:
Year
Income
Acquisition and Development Costs
Vehicle and Equipment Replacement
Payroll Costs
Mining Equipment Maintenance Costs
Mining Power Costs
Transport – Vehicle Maintenance
Transport Fuel
Other Costs
Profits
0
0
768
0
-768
1
648
0
0
214
16
25
10
63
82
238
2
684
0
0
222
18
25
12
68
86
253
3
666
0
0
218
20
25
14
66
84
239
4
648
0
0
214
22
25
16
64
82
225
5
630
0
125
210
24
25
18
62
80
86
6
612
0
0
206
16
25
20
60
78
207
7
594
0
0
202
18
25
22
58
76
193
8
576
0
175
198
20
25
24
56
74
4
9
558
0
0
194
22
25
10
54
72
181
10
540
0
125
190
24
25
12
52
70
42
Year
Cash Inflow
Discounting factor
Dis-cash flow
Dis-Cum Cash Flow
Cum Cash Flow
0
-768
1
-768.00
-768.00
-768
1
238
0.89
212.50
-555.50
-530
2
253
0.80
201.69
-353.81
-277
3
239
0.71
170.12
-183.69
-38
4
225
0.64
142.99
-40.70
187
5
86
0.57
48.80
8.10
273
6
207
0.51
104.87
112.97
480
7
193
0.45
87.30
200.27
673
8
4
0.40
1.62
201.89
677
9
181
0.36
65.27
267.16
858
10
42
0.32
13.52
280.68
900
NPV
280.68 Million
IRR
22.47%
Payback period
3 Years
Discounted payback period
4 Years
The above table evaluates the overall proposed investment plan for the Multinational mining Corporation, which can help in making adequate decision regarding commencement or rejection of the project. The table evaluates and provides all the relevant details regarding the cash inflow and outflow of the proposed investment during the time frame of 10 years (Awojobi & Jenkins, 2016). Furthermore, the table also helps in detecting the actual profit and net cash inflow of the proposed project, which can eventually help in making adequate investment decisions. The table helps in detecting the Net present value, internal rate of return, payback period, and discounted payback Period of the investment project. The positive NPV of 280.68 million indicates the positive factor for the investment project. The positive net present value directly indicates that the cash inflow of the organization is greater than initial investment, which is evaluated on the basis of time value of money. According to Throsby (2016), investment appraisal techniques directly allow the organization to segregate investment opportunities on the basis of highest return which can eventually improve income and form value in the long run.
The overall internal rate of return for the proposed project is a relatively at the levels of 22.47%, which is higher when compared to the cost of capital used by the organization (Enever, Isaac & Daley, 2014). The high value of internal rate of return directly indicates that your organization could generate positive cash flow over the period of time of the project. Moreover, the increment in the cost of capital until 22.47% is variable by the organization, which makes the project viable for investment. However, increment in cost higher than 22.47% would eventually hamper the initial capital investment, which will reject the investment proposal. In this context, Albertijn, Drobetz & Johns (2016) mentioned that internal rate of return is evaluated by managers to determine the investment options, which can generate the quickest returns from investment.
The calculation for payback period is also conducted, which indicates that the initial capital of the proposed investment plan can be collected within the 3-year period. Moreover, the discounted payback period is calculated to determine whether the impact of time value of money could have negative impact on the recovery of the overall initial investment (Fokkema, Buijs & Vis, 2017). From the relevant calculations is detected that the discounted payback period is at 4 years, which is only one or more than the discounted payback period. This directly indicates that would the time value of money organization can adequately retrieve the overall investment that has been conducted on the initial stage. This makes the proposed investment plan a lucrative investment opportunity that can be used by the multinational mining organization (Bas & Van, 2015).
The above calculation is relatively based on the overall projected numbers of the proposed investment plan, which is evaluated with the help of adequate investment appraisal technique (Locatelli, Invernizzi & Mancini, 2016). The projections are dependent on the production levels, which are estimated by the organization to fall 99% likely under the projected values. Furthermore, the coal prices and the running cost complement each other, while the increment also raises income of the company. The investment capital values the cost of maintenance, power supply, vehicle maintenance, and transport fuel cost have negative impact on cash inflows of the proposed project (Higham, Fortune & Boothman, 2016). The assumptions have been conducted to detect possible cash inflows and outflows that will be generated by the proposed investment plan to make higher revenue from investment. The project also evaluates the labor cost, which is evaluated on the basis of correlation between oil and coal prices. This directly indicates that prices of coal and oil is linked with cost of living, which can adversely affect payroll structure of the proposed plan (Enever, Isaac & Daley, 2014).
A discussion of the reasonableness of the target rate of return:
Required rate of return is used for calculating the Net present value of the investment projects. Therefore, determination of the cost of capital is an essential for the organization, which helps in determining whether the investment project can be accepted or rejected by the management (Almarri & Blackwell, 2014). The current required rate of return is calculated at the levels of 12%, which allows the organization to select and reject different investment projects. The current cost of capital of the organization has not changed for 20 years, which allowed the management to minimize the acquisition of risky projects and secure the investment capital. The cost of capital is calculated on the basis of minimum income that needs to be generated by the project as per the organization. The alteration in the cost of capital value has not been conducted for past 20 years, which indicates the sophistication, and input that has been demonstrated by the cost of capital of 12% for securing the risk position of the company. The management ignores and turns down the investment opportunity, which is considered too risky or has just met the requirement of 12%. This has allowed the management to minimize the negative impact of external forces, which affect the longevity of the organization (Alkaraan, 2015).
There are certain risks and obstacle associated with the overall investment proposal, which force the organization to use their cash reserves to support the investment plan. This investment plan has forced the organization to evaluate different circumstances and understand the overall implications and risk involved in the investment process (Harris, 2017). The second obstacle that is faced by the investment project is the high staff turnover and vacancies that need long time to fill. The high turnover of employees would increase the risk of low productivity and lead to the closure of mines due to the lack of adequate work force. This would relatively hamper the incomes that can be generated from the investment proposal. Hence, the organization could use the cost of capital for determining the risk associated with the new proposed endeavor. Higham, Fortune and Boothman (2016) indicated that organization use adequate cost of capital levels for detecting the investment opportunities and discard high risk investments, which can negatively affect their capital and increase their chance of insolvency.
Conclusions:
The assessment evaluates the Investment option that is presented to the multinational mining Corporation with the help of investment appraisal tools. These tools have provided an in-depth analysis on the prospects of the proposed plan. This has helped in evaluating different investment options, which can eventually help in detecting incomes that could be generated from the project. There is adequate methodology provided for evaluating the proposed plan, which identifies the use of net present value, internal rate of return, payback period, and discounted payback period for detecting the viability of the investment plan (Jorge-Calderon, 2016). Furthermore, the proposed investment plan has been evaluated by deriving all the values identified in the methodology. Further evaluation is conducted on reasonableness of the target rate of return that is proposed by the organization for evaluating the investment project. The conditions of risk have been evaluated for detecting significance of the cost of capital used by the organization for evaluating the project. Hence, the project has been successfully accepted by the organization on the basis of the investment appraisal techniques used for evaluating the projects current and future position.
Recommendations:
The proposed plan has been evaluated on the basis of investment appraisal techniques which has helped in identifying the advantages and loopholes of the project. From the evaluation of the net present value, it could be identified that the overall project is acceptable as it provides a positive value (Lefley, 2018). The overall value of 280.68 million will be generated by the proposed investment plan in accordance with the net present value method, which evaluate the cash inflows of the organization by using the time value of money. This estimation has indicated a positive attribute for the organization, which will generate higher values in future. Furthermore, the positive values of internal rate of return at the levels of 22.47% and the payback period at 3 years while the discounted payback period at 4 years directly provides a positive attributes for the proposed plan. On the basis of the overall investment appraisal techniques the proposed investment plan can be accepted by the organization to improve their income in future. Hence, it could be understood that with the acquisition of the new investment plan could adequately improve income in the long run and obtain sustainable growth of the organization.
Reference and Bibliography:
Albertijn, S., Drobetz, W., & Johns, M. (2016). Maritime investment appraisal and budgeting. In The International Handbook of Shipping Finance (pp. 285-313). Palgrave Macmillan, London.
Alkaraan, F. (2015). Strategic investment decision-making perspectives. In Advances in Mergers and Acquisitions (pp. 53-66). Emerald Group Publishing Limited.
Almarri, K., & Blackwell, P. (2014). Improving risk sharing and investment appraisal for PPP procurement success in large green projects. Procedia-Social and Behavioral Sciences, 119, 847-856.
Awojobi, O., & Jenkins, G. P. (2016). Managing the cost overrun risks of hydroelectric dams: an application of reference class forecasting techniques. Renewable and Sustainable Energy Reviews, 63, 19-32.
Bas, G., & Van der Lei, T. E. (2015). Dynamic investment appraisal: Economic analysis of mobile production concepts in the process industry. In Computer Aided Chemical Engineering (Vol. 37, pp. 245-250). Elsevier.
Baum, A. E., & Crosby, N. (2014). Property investment appraisal. John Wiley & Sons.
Bennett, M., & James, P. (2017). The Green bottom line: environmental accounting for management: current practice and future trends. Routledge.
Brisley, R., Wylde, R., Lamb, R., Cooper, J., Sayers, P., & Hall, J. (2016). Techniques for valuing adaptive capacity in flood risk management. Proceedings of the ICE-Water Management, 169(2), 75-84.
Elmassri, M. M., Harris, E. P., & Carter, D. B. (2016). Accounting for strategic investment decision-making under extreme uncertainty. The British Accounting Review, 48(2), 151-168.
Enever, N., Isaac, D., & Daley, M. (2014). The valuation of property investments. Estates Gazette.
Fokkema, J. E., Buijs, P., & Vis, I. F. (2017). An investment appraisal method to compare LNG-fueled and conventional vessels. Transportation Research Part D: Transport and Environment, 56, 229-240.
Harris, E. (2017). Strategic project risk appraisal and management. Routledge.
Higham, A. P., Fortune, C., & Boothman, J. C. (2016). Sustainability and investment appraisal for housing regeneration projects. Structural Survey, 34(2), 150-167.
Jorge-Calderón, D. (2016). Aviation investment: Economic appraisal for airports, air traffic management, airlines and aeronautics. Routledge.
Laird, J. J., & Venables, A. J. (2017). Transport investment and economic performance: A framework for project appraisal. Transport Policy, 56, 1-11.
Lefley, F. (2018). Dispelling the Myth Around the Financial Appraisal of Capital Projects. IEEE Engineering Management Review, 46(1), 47-51.
Li, F. G., & Trutnevyte, E. (2017). Investment appraisal of cost-optimal and near-optimal pathways for the UK electricity sector transition to 2050. Applied energy, 189, 89-109.
Locatelli, G., Invernizzi, D. C., & Mancini, M. (2016). Investment and risk appraisal in energy storage systems: A real options approach. Energy, 104, 114-131.
Throsby, D. (2016). Investment in urban heritage conservation in developing countries: Concepts, methods and data. City, Culture and Society, 7(2), 81-86.
Warren, L., & Seal, W. (2018). Using investment appraisal models in strategic negotiation: the cultural political economy of electricity generation. Accounting, Organizations and Society.
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