Market Analysis: A Critical Stage Before You Invest
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Madison Public Limited Co. is on standing on a pedestal of intellectual property business for a decade already and it has gained a lot of good reputation by maintaining a good image in the market by way of keeping all their clients intact over the years. As part of their dedication to public service, they are planning to explore new opportunities and possibilities by venturing into other expansion projects. To make this possible, the company has to search for possible alternatives of obtaining a great amount of funding to make their efforts possible.
The first option for MPLC in order to obtain funds should start within the four corners of their institution. Whether they like it or not, they have to identify with their accountant's unnecessary expenses and should start on reducing their tax bills. The money obtained from this scheme is converted to profit and will surely help in the expansion plans. One disadvantage of this scheme is that there are things to be set aside or sacrificed, but as it will go along the way, the company will feel its advantage more than the temporary clamor from some people.
Second, the company should take the opportunity of being an intellectual property venue because they can apply for small business innovation research. If a new invention is made or a beneficial scientific discovery is undertaken, it could be made known to government or non government organizations, and after its benefits are made known to the public, it is possible that it could gain respect or sympathy, which would mean the full financial support from the people with thick pockets.
Third, it is also good to consider the members of your family and your closest friends to invest in a particular project in your company. Their act of helping you in your expansion is not purely a dole out. After the projected success of your project expansion, it is now the turn of the company what is due for everyone behind the success of the expansion. It may take a longer time to convince people to invest in a certain project but, it will be worth the wait. In order not to hurt feelings or emotions, all interested investors should be gathered together in a conference and should be made to understand that the undertaking that is to be done is like participating in a gambling. It’s taking a necessary risk, not after the return of investments but the commitment to help improve the image of the company.
The next big thing for the company to consider so that they will be able to get funds for expansion is creating a policy on advance payments from customers. The marketing team should see to it that the prompt and friendly delivery of the company’s services to the customers is maintained or even more improved so that it will be easy for subscribers to issue a paycheck in advance or pay in cash immediately after being happy and satisfied with all the company has to offer.
Then, it’s also viable if the company’s plan for expansion is coordinated properly and documented accordingly to reach the portals of local and state economic development organizations. By simply filling up an application form and submitting the necessary requisites for a certain amount, the institution can lend money for smaller interest rates alongside with local or foreign banks.
Moreover, the company’s plan for expansion will likely succeed if an application for a loan in a bank is decided and made known to the CEO and his board of trustees or directors. Approaching a loan officer is much easier to do rather than the suggested options above. The main advantage of a bank loan is that it gives a clearer or transparent transaction because the terms are already fixed and the conditions are according to the proper lending act of the country.
Furthermore, it is also good for the company to lease its fixed assets, either for short or long terms. The lease amount, depending on how many establishments or buildings are advertised for occupancy, could definitely add finances to the company’s working capital, making it possible to utilize for the company’s expansion plans and programs.
Lastly, the company aiming for an expansion could generate money, basically by selling its shares to investors. Unlike bondholders, equity funding will not require investors to pay interest. It means that all the profits are distributed equally among all those who made the investments.
In any business endeavor, may it be big or small, it is always important to put in mind that managing the company’s finances is of great importance. The term efficient working capital would mean success for every project or proposal that the company has to undertake. Money is, therefore, the blood of the business and without it, there could be no existing business at all. The problem with some companies is the ability to establish secure operating expenses and the inability to pay even short-term debts. If employees, for example, are not paid on time and pieces of machinery and pieces of equipment for manufacturing and production are not working, it will surely cripple a day’s work and a lot of revenues are lost, making it very unfavorable for the company. This will also create trouble or chaos, since different emotions and personalities have been offended, as a result of mismanagement of finances.
This is mainly a very important role in managerial accounting in business. The cash on hand and the cash in the bank should be intact and should always increase in amount, for the company to say that it is really earning, not losing. Cash equivalents, receivables, prepaid expenses, and liquid assets contribute to the earnings of the company since all that were mentioned are convertible to cash.
There should always be check and balance in the management of finances. The amount in the income statement should also reflect the deductions on current liabilities that the company has incurred. Other ways of managerial accounting include inventory turnover, inventory management, and cash management.
In order to decide on which software to develop, we look into the NPV & IRR of both Madison Super and Madison Platform. Both of them present are optimal choices for investment, with the former’s NPV at 15,006.60 and an IRR of 41.39%. In a similar manner, the latter’s NPV at 24,374.73 and an IRR of 33.74%. (see attached file)
Looking at the data, we could say that Madison Platform’s NPV is 1.6% higher than Madison Super. On the other hand, Madison Super’s IRR is 1.2% higher compared to Madison Platform.
In general, the company is not so much concerned on the present value but more importantly on the return of investment (ROI) which is greatly contributed by the IRR. Therefore, the company must develop and continue the development of Madison Super.
To calculate the NPV, we subtract the current value on the inflow of cash and the recent value on the outflow of cash respectively. These financial positions are recorded and given in the following manner:
· The discount rate with the specific percentage
· The life of the project given in a specific number of years
· The initial cost to be written in negative value since there is no clear direction or outcome whether the venture will be a success or a failure.
· The first cash flow
· The second cash flow
· The third cash flow
· The fourth cash flow
· The fifth cash flow
· The sixth cash flow
· The seventh cash flow
· The eighth cash flow
· The ninth cash flow
· And finally, the tenth cash flow
After all the necessary data are given, it will automatically compute the NPV and the PVECF.
In order that the NPV of Madison Super is justified, the following data are given:
· Discount rate at 14%
· Duration of the project ends in the fifth year
· Starting capital at -400
· First cash flow at 400 every year
· Second cash flow at 550 every year
· Third cash flow at 700 every year
· Fourth cash flow at 850 every year
· Fifth cash flow at 1000 every year
· Sixth cash flow at 5500 every year
· Seventh cash flow at 6500 every year
· Eighth cash flow at 7700 every year
· Ninth cash flow at 8750 every year
· Tenth or last cash flow at 9800 every year
Likewise, to also justify the Net Present Value of Madison Platform, the following data are given:
§ Discount rate at 13%
§ Duration of the project also ends in the fifth year
§ Initial cost at -500
§ First cash flow at 500 every year
§ Second cash flow at 653 every year
§ Third cash flow at 806 every year
§ Fourth cash flow at 959 every year
§ Fifth cash flow at 1112 every year
§ Sixth cash flow at 6200 every year
§ Seventh cash flow at 7564 every year
§ Eighth cash flow at 9001 every year
§ Ninth cash flow at 10531 every year
§ And finally, tenth cash flow at 12006 every year
After the computation, the results are given as follows:
Madison Super’s Net Present Value is at £ 15,006.06 and Present Value of expected cash flows at £ 15,406.06.
The interpretation is as follows:
Given a 14.00% discount rate in a five year period, the cash flow projection is presently at £ 15,406.06, obviously bigger than the first payment of £400. The Net Present Value is in a favorable position because the business venture or expansion will yield an estimated amount of £15,006.06, directly telling the employees and the executives of the company that giving a go signal on the project will place the company in a comfortable market position.
But, it must be put in mind that the Net Present Value cannot be a guarantee or an assurance for a long-term investment because the projection on the flow of cash over the duration of the business venture is just a rough estimate of what the company would earn over the next five years. The reliability and the validity of these given figures are mainly in the brains and hands of the business analyst and the realization of these dreams greatly depends on a collaborative effort of the bosses and the employees of Madison PLC, in order to foresee between the balance of its risky financial status and the necessary steps or moves to be undertaken so that the project can be considered a success.
On the other hand, Madison Platform’s Net Present Value is at £24,374.73 and Present Value of expected cash flows at £24,874.73.
The interpretation is as follows:
Given a 13.00 % discount rate in a five year period, the cash flow projection is currently at £24,874.73, also obviously bigger than the first payment of £500.00. The Net Present Value is also in a favorable position because the second business venture or expansion will also yield an estimated amount of £24, 374.73, directly telling the employees and the executives of the company that giving a go signal on the project will place the company in a comfortable market position.
But, it must also be foreseen that the Net Present Value cannot and will not be a guarantee or an assurance for a long-term investment because the projection on the flow of cash over the duration of the business venture is just purely an estimate of what the company would earn over the next five years. The reliability and validity of these given figures are mainly in the brains and hands of the business analyst , and the realization of these dreams greatly depends on a collaborative effort of the bosses and the employees of Madison PLC in order to foresee between the balance of its risky financial status and the necessary steps or moves to be undertaken so that the project can be considered a success.
The NPV and IRR results of both Madison Super and Madison Platform were computed using the following formulas:
 where C is the summary of cash flows for each period (n) in the holding period (N), discounted at the investor’s required rate of return (r).
and
 where 0 is the NPV equation to solve for the rate of return.
(Formula and explanation retrieved from http://www.propertymetrics.com/blog/2013/06/28/npv-vs-irr/).
For a further understanding of the Internal Rate of Return, the following explanations are made:
Both Madison Super and Madison Platform assumed the number of cash flows for five years.
During the initial investment period, Madison Super has an estimated net cash flow of (-£400), £400 year one, £550 for year 2, £700 for year 3, £850 for year 4 and £1000 for year five. Total inflow for the cash in is pegged at £3500, total outflow on initial investment or cash out is £2400 and a total net cash flow of £1100. Using the IRR formula, you get an Initial Rate of Return at 41.39%
Similarly, Madison Platform, during its initial investment period has an estimated cash flow of (-£500), £500 for the first year, £653 for the second year, £806 for the third year, £959 for the fourth year and £1112 for the fifth and last year. The total cash inflow is also pegged at £4030, total cash outflow or initial investment at£3000 and a total net cash flow at £1030. Using once more the formula on IRR, you get an Initial Rate of Return at 33.74%.
It should be understood that both NPV and IRR have their individual limitations. NPV doesn’t take into consideration the timing or variability of cash flows and it is also difficult to accurately estimate the discount rate. There is also a difficulty in the riskiness of the projected cash flows. (Retrieved from http://www.propertymetrics.com/blog/2013/06/28/npv-vs-irr).
Likewise, the IRR ignores the initial investment amount and it doesn’t equal the return on your initial investment over the holding period. Retrieved from http://www.propertymetrics.com/blog/2013/06/28/npv-vs-irr.
There is really no specific indicator whether the NPV or IRR could be used as a credible reference to making investments and it is safe to assume that both should be taken into consideration when also coming into terms with plans in making further expansions or other business ventures.
This would clearly mean that Puteaux France has a greater advantage over Melia Spain due to the following reasons:
1. Based on their net income/profit, Puteaux France has a 1.33 % increase in the year 2012 and a 1.09% increase in 2013.
2. Melia Spain’s net profit from 2011 to 2013 is negative and subject for a deduction to the total assets and liabilities.
3. Puteaux France’s net assets are far better than that of Melia Spain.
4. Even though Melia Spain’s shareholder’s funds are reflected as positive, it is still considered as deficit based on the numerical data provided beforehand.
5. Puteaux France’s shareholder’s equity rose at 1.28% and 1.24% respectively for the year 2012 and 2013.
One very important consideration in making investments is knowing when your initial investment would be returned to you at an advantageous interest rate. Looking at the financial statement of Puteaux France, it is very clear and evident that their net profit from 2011 to 2013 raised 2.42% for a period of two years compared to Mellia Spain’s deficit of roughly more than three percent for the same number of years.
Another important justification why Madison PLC should invest in Puteaux France because its net assets increased 2.51% for a period of two years as compared to Mellia Spain’s outstanding and increasing deficit of 3.71%.
Lastly, future investors are in a favorable position if they will choose Puteaux France over Mellia Spain because their shareholder’s funds rose to a whopping 2.52% for a period of two years as compared to Mellia Spain’s continuing deficit at 3.72%.
A break-even analysis revealed that if these are the numbers for Puteaux France, Madison PLC will earn an estimated daily income increase of £150,000, a net asset increase of £145,000 and a shareholder’s fund increase of £145,000.
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