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Net present value method (also known as discounted cash flow method) is a popular
capital budgeting technique that takes into account the time value of money. It uses net present
value of the investment project as the base to accept or reject a proposed investment in projects
like purchase of new equipment, purchase of inventory, expansion or addition of existing plant
assets and the installation of new plants etc.
The Internal rate of return is a discounting cash flow technique which gives a rate of
return that is earned by a project. We can define the internal rate of return as the discounting rate
which makes a total of initial cash outlay and discounted cash inflows equal to zero. In other
words, it is that discounting rate at which the net present value is equal to zero. Internal Rate of
Return (IRR) is a financial metric for cash flow analysis, primarily for evaluating investments,
capital acquisitions, project proposals, programs, and business case scenarios.
It considers the time value of money even though the annual cash inflow is even and
uneven.
1. The profitability of the project is considered over the entire economic life of the project.
In this way, a true profitability of the project is evaluated.
2. There is no need of the pre-determination of cost of capital or cut off rate. Hence,
Internal Rate of Return method is better than Net Present Value method.
1. This method assumed that the earnings are reinvested at the internal rate of return for the
remaining life of the project. If the average rate of return earned by the firm is not close to the
internal rate of return, the profitability of the project is not justifiable.
3. This method gives importance only to the profitability but not consider the earliest recouping
of capital expenditure. The reason is that sometimes Internal Rate of Return method favours a
project which comparatively requires a longer period for recouping the capital expenditure.
Under the conditions of future is uncertainty, sometimes the full capital expenditure cannot be
recouped if Internal Rate of Return followed.
4. The results of Net Present Value method and Internal Rate of Return method may differ when
the projects under evaluation differ in their size, life and timings of cash inflows.
The IRR rule states that if the internal rate of return (IRR) on a project or an investment
is greater than the minimum required rate of return, typically the cost of capital, then the project
or investment should be pursued. Conversely, if the IRR on a project or investment is lower than
the cost of capital, then the best course of action may be to reject it.
BASIS FOR
COMPARISON NPV IRR
Business processes are simply a set of activities that transform a set of inputs into a set
of outputs (goods or services) for another person or process using people and tools. We all do
them, and at one time or another play the role of customer or supplier.
You may see business processes pictured as a set of triangles as shown below. The purpose of
this model is to define the supplier and process inputs, your process, and the customer and
associated outputs. Also shown is the feedback loop from customers.
Business process reengineering is also known as BPR, Business Process Redesign, Business
Transformation, or Business Process Change Management.
Such an approach is pictured below. It begins with defining the scope and objectives of your
reengineering project, then going through a learning process (with your customers, your
employees, your competitors and non-competitors, and with new technology). Given this
knowledge base, you can create a vision for the future and design new business processes.
Given the definition of the "to be" state, you can then create a plan of action based on the gap
between your current processes, technologies and structures, and where you want to go. It is
then a matter of implementing your solution.
"... the fundamental rethinking and radical redesign of business processes to achieve dramatic
improvements in critical contemporary measures of performance, such as cost, quality, service,
and speed."
Each organisation must determine itself when it is appropriate for them to reengineer.
Reengineering should be done only if it can help in achieving an enhanced strategic position.
Some strategic indicators that require reengineering include
1. Realisation that competitors will have advantage in cost, speed, flexibility, quality or service
New regulations
So, if the company is at the cutting edge of an industry that has just undergone major changes
reengineering might not be appropriate.
However, if the organisation operates with old models instead of new technologies and
approaches used by others, reengineering may be urgently needed. Even if technical
performance is adequate, other improvements may be needed – such as training, organisational
change, leadership development etc. In such circumstances also reengineering is required.
The best way to map and improve the organization's procedures is to take a top down approach,
and not undertake a project in isolation. That means:
Starting with mission statements that define the purpose of the organization and describe what
sets it apart from others in its sector or industry.
Producing vision statements which define where the organization is going, to provide a clear
picture of the desired future position.
Build these into a clear business strategy thereby deriving the project objectives.
Defining behaviours that will enable the organization to achieve its' aims.
For reengineering to be successful, people from different levels in the organisation need
to be involved. In fact, the mandate and inspiration of reengineering must come from the
highest leadership. Most critical is the support of Chief Executives. In addition other
Champions will have to be identified. They have to be the opinion makers and influence those
who can shape the organisation to support the reengineering implementation. Strategic and
tactical steering teams also play an important role. Their function is to provide strategic
direction to the reengineering process and help the management of change through effective
communication in order to resolve organisational issues. A reengineering czar can also be
appointed
A strategic window focuses attention on the fact that there are only limited periods
during which the “Fit” between the key requirements of a market and the particular competencies
of a firm competing in the market is at an optimum Disinvestment should be contemplated also
The four basic strategic choices outlined above may be viewed at hierarchy in terms of resource
commitment
1. Careful analysis has to be made of the gap of which may emerge between the evolving
requirements of the market and the firm’s profile
2. To what extent can the changes be anticipated?
3. How rapid are the changes which are taking place?
4. How long will realignment of the fundamental activities of the firm take
5. What current commitments, distribution channels constrain adaptation?
6. Can new resources and new approaches be developed internally or must they be acquired?
New entrants
Careful assessment of the firm’s strength and weaknesses Attention should be directed away
from narrow focus of familiar products. This requires a broader appreciation of overall
environmental, technical and market forces
The strategic window suggests that fundamental changes are needed in marketing
management practice. And particular in strategic market planning activities. Entry and
exit from markets is likely to occur with greater rapidity. This article suggests that as far as
anyone firm is concerned, a market also is a temporary vehicle for growth, a vehicle we
should develop or abandon as the circumstances dictate. With the help of this discussion
with management will help to convey to take this step further.
Answer 3 B)
Restructuring is corporate management term for the take action of incompletely dismantling or
else reorganizing a company for the purpose of making its well-organized and consequently
more profitable. It usually involves selling off portions of the business and making severs staff
reductions. One of the mainly high profile features of the company and investment worlds is
corporate restructuring. Corporate restructuring is the procedure of redesigning one or more
feature of a company. Now are some examples of why corporate restructuring may take position
and what it can represent for the company.
1. Joint ventures
2. Sell off and spin off
3. Divestitures
4. Equity carve out
5. Share repurchase
6. Leveraged buy outs
7. Management buy outs
8. Master limited partnerships
9. Employee stock ownership plans
Joint Venture
Joint ventures is a business enterprise for profit, in which two or more parties share
responsibilities in an agreed manner, by providing risk capital technology patent trademark
brand name to access to market. Joint ventures with multinational companies give to the
development of production capacity; transfer of technology and capital and over all dpenetrating
into global market. Entering into joint ventures is a part of strategic business policy to diversify
and enter into new markets, acquire finance, technology, patent and brand names.
2 – Better resources
Forming a joint venture will give you access to better resources, such as specialized staff and
technology. All the equipment and capital that you needed for your project can now be used.
1 – Vague objectives
The objectives of a joint venture are not 100 percent clear and rarely communicated clearly to all
people involved.
Divestiture
Advantage: .
1. Strategic Focus
Companies often divest assets and business units that no longer fit with the company's core
business. Divesting therefore helps companies maintain their strategic focus
2. Transparency and Value
Divestitures also provide greater operational transparency in companies with large and diverse
businesses and activities.
Disadvantage:
1. Costs
One potential disadvantage of a divestiture is the negative impact on a company's cost structure.
2. Contractual
A divestiture has other disadvantages. Partnership agreements, support agreements and vendor
contracts may contain mentions of the divested business.