Strategic Investment Decisions Involving Valuable Business Opportunities

This approach allows for valuing real assets with some degree of operating flexibility, incorporating the value of the flexibility into the option price. It values the option to exercise but not the obligation to make future investments. It is based on the law of one price (the price of two portfolios with the same cash flows in every state of the world must be the same). Option value increases with great uncertainty (see Exhibit 3). The major uncertainties are Arundel Partners’ WACC and volatility of return on assets. A sensitive analysis shows the degree of changes with the changing uncertainties. The major disadvantage of this approach is that it often requires changes in business process. In Arundel Partners’ case, the terms and provisions in the contract will mitigate some of the disadvantages.

The valuation techniques used to assess business performance are essential in order to take investment decisions. The case of Spa is no different than other business decisions. It is required to take appropriate technique for business valuation and competitor analysis. The business incorporates discounted cash flow, relative valuation, and contingent claim valuation techniques as standard practices for valuing business worth. The business valuation is significantly different from equity valuing techniques. It is also noted that the traditional evaluations of business are performed through review of financial statements while contemporary techniques are based on future options models.

America Cable Company (ACC) should use APV approach to value cash flows from 2008 to 2012. This is because ACC uses classis LBO approach for acquisition where it purchases the target with significant amount of debt, and then in the long run paid the debt to bring down the leverage to industry norms. The goal is to use a tax efficient route and maximize the present value of tax shields, and minimize the amount of up-front equity invested in the deal.

Free Cash Flow = Sales Revenues – Operating Costs and Taxes – Required Investments in Operating Capital. Weighted Average Cost of Capital (WACC) is affected by market interest rates, market risk aversion, cost of debt, cost of equity, firm’s debt/equity mix, and firm’s business risk. Therefore, free cash flows and the weighted average cost of capital interact to determine a firm’s value by the following equation:

The presence of "real options" within any business venture sets up the ability for institutions to pinpoint the strategic options and opportunities that are embedded in their everyday projects and investments. In viewing these options and in understanding that each of these has the ability to have a material impact on both cash flow and risk, it is essential that any company or entity dealing with financial management fully understand the Real Options Theory, especially in its regard to financial management and modeling within a business or institution. In understanding the issues that come into play when the Real Options Theory is utilized, as well as viewing the available literature on the topic, one can better apply the theory to first-hand experiences in the workplace. In doing so, an individual and financial managers in particular can begin to better understand which applications of the theory are essential to the workplace in order to maximize total effect and overall profitability. In understanding these facets, it becomes clear that the Real Options Theory provides financial managers of any entity that employs it better strategic thinking and tools for financial analysis, therefore imparting business success in the long-run.

The factors that affect investments are based on the priorities of the stakeholders and decision makers, which are either based on long term growth or short term profit. In most cases firms tend to invest over long term (Adler R.W. 2000). There are many formal methods that are used in Investment appraisal and many of which are criticized as being traditional;

10-9 Real Options are opportunities embedded in real assets that are part of the capital budgeting process. Managers have the option of implementing some of these opportunities to alter the cash flow and risk of a given project. Examples of real options include: Abandonment – the option to abandon or terminate a project prior to the end of its planned life. Flexibility - the ability to adopt a project that permits flexibility in the firm’s production process, such as to be able to reconfigure a machine to accept various types of inputs. Growth - the option to develop follow-on projects, expand

The reader interested in methods based on value creation measures can see Fernandez (2002, chapters 1, 13 and 14). The reader interested in valuation using options theory can see Fernandez (2001c).

Entrepreneurial opportunities can be found through many sources, but the entrepreneurs own observations are often the most valuable. This includes market knowledge generated as a consumer, such as the authors consumer knowledge of the marijuana industry (Hisrich, Peters, & Shepherd, 2013). With this knowledge, the author has been able to identify a need for a heated tool for use with concentrates, both at the manufacturing and consumer levels. Below, this opportunity will be detailed further. This will be followed by a brief look into the strategies used to both generate and exploit this opportunity.

Manufacturing industry is brimming with rivalry due to the presentation of new and advanced technologies to help manufacturing processes. These new technologies are capital investment a manufacturing organization must acquire to compete with others in the business. The choice to put resources into these new and advanced technologies requires appropriate investment appraisal techniques that can adapt to the quick changing environment of the manufacturing industry. These choices are vital investment decision. As indicated by Adler R.W (2000), Strategic investment decision making includes the methodology of recognising,

Investment decisions impact the long-term success or failure of a company. The capital budgeting theory assumes that the primary goal of a firm's shareholders is to maximize firm value. The process of analyzing and prioritizing investment opportunities is capital budgeting. Capital budgeting involves three basic steps of identifying potential investments, analyzing the set of investment opportunities that will create shareholder value, and implementing and monitoring the investment projects that a firm should undertake. Managers need analytical tools to help them make the best investment decisions for their firm. This paper will explore six different methods of evaluating investment projects and their advantages and disadvantages. The six methods are the payback period, discounted payback period, net present value, profitability index, internal rate of return, and modified internal rate of return, which method is most used in business, and issues related to capital budgeting.

Private’s schools average revenue is around $68.7bn Profit $4.7bn Wages $33.2bn Businesses 28,525 Annual Growth 17-22 1.4% Annual Growth 12-17 2.1%

Investment decision, by itself, is not a complicated one, as once we manage to consider all aspects of costs associated with the investment decision and to estimate its expected returns, there will be no difficulty to make a proper decision regarding the proposed investment. The main problem in making any investment decision is the ability to consider all aspects of costs that the investment will expose to. Investment costs can be divided into tangible and intangible costs. Where tangible costs classified as constructional and operational costs; intangible costs include opportunity cost and

There are serval strategic options that can help business to grow. Firms choose the most suitable growth strategy based on the consumers, market situation and expansion objectives. The trend of globalization and internationalization drives the need to increase competitiveness by decreasing cost of production. Internationalization is a commonly adopted strategy for firms nowadays to expand their businesses and acquire more sales all over the world. It is defined as ‘developing networks of business relationships in other countries through extension, penetration and integration’ (Johanson & Mattsson, 1988). Firms usually use Ansoff’s Product/Market matrix to create a strategic planning tool that provides a framework to help entrepreneurs or

Companies spend a great deal of time and money on new investments. Executives need measures of productivity of capital, which can be applied to distinguish good ones from bad ones. There are broadly two types of measures – some based on accounting income and some based on cash flows. The cash flow based measures can be further categorized as those that consider time value of money and those that don’t. Cash flow based measures that consider time value of money are called Discounted Cash Flow (DCF) techniques.