Analysis of Moulton's Global Financial Strategy in Poland

This report analyzes Moulton's global financial strategy, specifically focusing on a potential investment in Poland. It begins with an introduction to capital budgeting and the Net Present Value (NPV) method, followed by NPV calculations under different inflation scenarios and sales increase scenarios. The report calculates NPV considering Poland's inflation rate and compares it with the US inflation rate, evaluating the profitability of the project under different conditions, including sensitivity analysis of inflation and sales changes. Furthermore, the report identifies and discusses various market risks, especially economic risks, that Moulton might face in Poland and proposes mitigation strategies. The report concludes with recommendations on whether Moulton should proceed with the investment, considering both the financial projections and the potential risks involved.

Global Financial Strategy

Table of Contents
INTRODUCTION...........................................................................................................................1
(a) Computation of Net Present Value (Analysing the two case scenarios)...............................1
(b) Risks in the market and strategies to mitigate them..............................................................5
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

Index of Tables
Table 1: Calculation of Net Present Value......................................................................................1
Table 2: Calculation of Net Present Value (Case 1)........................................................................2
Table 3: Calculation of Net present Value (Case 2)........................................................................3

INTRODUCTION
Capital budgeting technique is determination of potential cash inflow and outflow
through a particular asset or replacement of the asset in a particular period. It has an important
impact on short term and long term investment decisions of the entity (Hise and Strawser, 2013).
The report discusses the case study of Moulton who is planning to invest in European countries
as well. The Net Present Valuer of the investment will be analysed in the report in order to assess
the profitability of the project. Moreover, the report will also focus on sensitivity analysis of the
cases being provided in order to evaluate occurrence and non occurrence of the scenarios.
Further, it will discuss several risks that can be faced by the company. Several management
strategies will also be discussed in order to cope up with the risks.
(a) Computation of Net Present Value (Analysing the two case scenarios)
Moulton is involved in food processing company which is currently functioning in US.
The enterprise is planning to expand its business in East Europe starting from Poland. As per the
current economic conditions of the two countries it can be assessed that the Poland have been
going through 6% inflation rate in the economy. Moreover, US have been experiencing 2%
inflation.
Net present Value is an effective method to make future projections of cash flows with
respect to an investment. It is vital method of capital budgeting used by the entities in order to
assess that whether the investment will prove to be profitable for the company or not ( Hall and
et.al., 2012). Moreover, it also considers time value money factors in order to calculate the Net
Present Cash Flow through the project. This method will be used to analyse the net cash flow for
Moulton in order to assess that whether the investment in Poland will prove to be profitable for
the entity or not. Relative purchasing power parity helps in assessing the purchasing power
amount that can increase or decrease due to change in inflation rate between the countries
(McKinnon and Ohno, 2016). Relative change in price levels can also be assessed which help in
compensating the difference in inflation rates. The below formula is used to calculate the
amount:
S1 / S0 = (1 + Iy) / (1+ Ix)
where,
S1 = Spot excahnge rate at the beginning of the period
S0 = Spot exchange rate at the end of the period
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Iy = Annualised inflation rate of country Y (foreign country)
Ix = Annualised inflation rate of country X (Domestic country)
Table 1: Calculation of Net Present Value
Years Estimated Cash
flow
Inflation(@ 6%)
(A)
Discounted Cash flows
(B)
Present
value ('000)
(A*B)
0 -40000
1 8000 (8000*(1.06/1.02))
= 8313.7 0.87 7232.92
2 10000 (10000*(1.06/1.02))
=10392.16 0.756 7856.47
3 15000 (15000*(1.06/1.02))
= 15588.24 0.658 10257.06
4 15000 (15000*(1.06/1.02))
= 15588.24 0.572 8916.47
5 15000 (15000*(1.06/1.02))
= 15588.24 0.497 7747.35
Total Present Value 42010.27
Less: Initial investment -40000
Net Present Value 2010.27
Based on the above calculation of Net present value, it can be analysed that the company
is able to generate Pz 2,010,270. However, the entity is expecting that the value will be Pz
800,000 at the end of 5th year. The case will be same if similar inflation rate will be carried out
for the next 5 years. In this case the company should not invest in the project as the actual return
is less than the desired one.
Converting the values of net proceeds from Poland's Zolty to US dollar (Helleiner and
Kirshner, 2012). The current exchange rate is US $1 = Pz 4
Hence, Pz 2,010,270 = US $ 502567.5
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Case 1: It has been mentioned that the inflation rate will decrease to 4% which was 6% earlier. It
will have a significant impact on the cash flows of the company. The inflation from the home
country that is US is 2%.
Table 2: Calculation of Net Present Value (Case 1)
Years Estimated Cash
flow
Inflation (@ 4%)
(A)
Discounted Cash flows
(B)
Present
value ('000)
(A*B)
0 -40000
1 8000 (8000*(1.04/1.02))
= 8156.86 0.87 7096.47
2 10000 (10000*(1.04/1.02))
= 10196.08 0.756 7708.24
3 15000 (15000*(1.04/1.02))
= 15294.12 0.658 10063.53
4 15000
(15000*(1.04/1.02))
= 15294.12 0.572 8748.24
5 15000 (15000*(1.04/1.02))
= 15294.12 0.497 7601.18
Total Present Value 41217.65
Less: Initial investment -40000
Net Present Value 1217.65
In this case, if the country faces 4% inflation which is lower than the inflation rate
considered earlier then the Net Present Value will decrease to Pz 1,217,650. However, the
expected return of the company is 8,000,000. Hence, it can be interpreted that the amount of net
present Value after 5 years is less than the expected one. It shows that Moulton should not accept
the project. It can be observed that there is a decrease in the cash flow with reduction in the
inflation rate as it will reduce the total cash inflow among the years as well.
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Converting the values of net proceeds from Poland's Zolty to US dollar. The current
exchange rate is US $1 = Pz 4
Hence, Pz 1217650 = US $304412.5
Case 2: The case of increase in the cash inflow through the sales have been considered by the
company.
Table 3: Calculation of Net present Value (Case 2)
Years Estimated Cash
flow
Increase in
sales by 30%
Inflation (@6%)
(A)
Discounted
Cash flows
(B)
Present
value
('000)
(A*B)
0 -40000
1 8000 (8000*(1.06/1.02))
= 8313.73 0.87 7232.94
2 10000 (10000*(1.06/1.02)
) =10392.16 0.756 7856.47
3 15000 19500 (19500*(1.06/1.02)
) = 20264.71 0.658 13334.18
4 15000 19500 (19500*(1.06/1.02)
) = 20264.71 0.572 11591.41
5 15000 19500 (19500*(1.06/1.02)
) = 20264.71 0.497 10071.56
Total Present Value 50056.56
Less: Initial outlay -40000
Net Present Value 10086.56
As per the second case scenario, if the sales will increase by 30% in year 3, 4 and 5; it
will help in generating Pz 10,086,560. Moreover, an increase in the sales is able to meet the
expectations of the return of the company as well. Hence, zloty can accept the project in with the
positive expectation of generating higher returns.
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The amount that will be received from the second case scenario can be converted in the
currency of the home country, that is, US. currency.
Converting the values of net proceeds from Poland's Zolty to US dollar. The current
exchange rate is US $1 = Pz 4
Hence, Pz 10086560 = US $2522390
It can be recommended that the company should accept the project if the second scenario
has been applied to the company. It means that it will be able to meet the goals of expected
return if there is a rise in sales by 30% from the third year. The investment will prove to be
profitable.
Sensitivity analysis: It is important to understand that in the first case scenario there is 40%
percentage chances that the inflation will decrease ton 4%. Hence, it can be assessed that there
are 60% chances of non occurrence of the event. It shows any reduction in the inflation rate will
change the net cash flow as well. Change in the cash flow will depend on occurrence and non
occurrence of the event.
Based on the second scenario been provided, there are 30% percentage chances that there
will be an increase in the sales of the company. It will ultimately increase the cash flow as well.
It means that there are 70% chances that there will be n increase in the sales. If no increase is
experienced by the company, no escalation in the cash flow will be noticed (Cristescu and et.al.,
2012). In that case, the company need to reject the project as it will not be able to meet the
desired returns from the project of investment in European countries.
There are various reasons to the recommendations. Some of them are listed below:
 Net Present Value is an effective method to calculate the profitability of the project as it
considers both time and risk involved in a particular project. It is a reliable methodology
on which Moulton can trust while making financial decisions.
 The company will be able to meet the expectations of the cash flow that it has made in
the beginning of the investment.
 Net Present Value takes into account tie value money factor while calculating the cash
inflow and outflow from the project. Hence, it has been considered while analysing the
profitability of the investment in different case scenarios.
 The investment will prove to be more profitable if the second case scenario occurs and an
increase in the sales will be experienced by the company. In comparison to the other case
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scenario been mentioned in the case, second case will prove to be more beneficial and
profitable while making investment in Poland.
 Moulton is already present in US and is going to expand in European counties. It should
not start the project where it is earning fewer profits unless and until not getting expected
returns.
(b) Risks in the market and strategies to mitigate them
Risks in the market
Food processing industry is one of the fastest growing industry in Poland. Across globe
mentioned domain is elevating at fast rate and Poland is not exception to it. There are ample
opportunities in the mentioned market but at same time there are also few risks to which firm is
exposed. It is very important to address these risks in systematic manner because some times
same have huge negative impact on business firms. Some of the risks that firm may faced in
Poland is explained below.
Economic risk: Economic environment have significant impact on business firms because
economic condition of any nation play vital role in ascertaining expenditure up to which people
will be prepared to be made on the market. In current time period economic conditions across
globe are not congenial for business enterprises. Slowdown is observed in major global
economies and shrink in growth rates of few nations like China will have significant impact on
global economy. Poland may be indirectly hit by downturn if happened in Chinese economy.
Currently, GDP growth rate of Poland is 1.1% which is very low as compared to developing
economies like India which is on growth track (Poland GDP growth rate, 2017). It is anticipated
that further if global economy entangled in grip of recession growth rate of Poland GDP may
tumbled at fast pace. This may heavily affect unemployment rate and inflation rate. At this front
also condition is not good but better than before. Presently, unemployment rate of Poland is 7.1%
which declined from 8.1%. This signal that government policies prove effective but in case GDP
tubeleed by specific percentage unemployment rate may increase. Inflation rate is also very low
which is just 1.8%. It can be considered very small percentage.
All these things create a big risk for the firm in new market. Unemployment rate further
if increased then people spending power will reduce as employed people have to bear burden of
unemployed people (Raisova., Buleca and Michalski, 2014). Hence, spending of people may
reduce and this may reduce firm profitability in new market. Inflation rate is already low and due
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to decline in demand it will further decrease. In such kind of case firm have to offer its product at
low price which means less margin will be earned on sold items. Thus, firm performance may
deteriorate in new market. This is one of major risk that may be faced by firm. It can be said that
probability of less demand of product in market is one of major risk that may be faced by the
firm.
Competiton: Market expansion is one of common strategy on which most of the firms work in
order to increase their growth rate. Currently, there are about 33000 food processing firms are
operating in Poland and with passage of time same will increase. Thus, competition is already
very high in the market (Hsiao and et.al., 2010). As a new player it will be hard for firm to grab
market share in industry. On analysis of consumer behaviour it is identified that people are
prepared to pay more for superior quality products. This reflect that there is demand for product
in the market and by offering only superior quality product firm can gain competitive edge over
its competitors. However, this does not mean that people are not price sensitive. There are
number of people that want to buy products at very low price. Thus, maintaining balance
between product quality and price is main challenge that firm have to handle in its business
(Ozimek and Żakowska-Biemans, 2011). It is very difficult task to maintain low price of product
and quality at same time and if firm failed to manage both then it may face heavy loss in the
market and it is major risk that firm may face in its business.
Cost control: Every firm main target always is to control cost in the business. This is because in
current time period people wants to buy quality products at cheaper price. Thus, it becomes very
important to maintain control on quality and cost of product. There are number of control
systems that can be used at workplace to control cost but even though firms failed to maintain
control on cost. This is one of major risk to which firm is exposed because if cost of product
increase then same can not be passed to customers. Hence, price remain same and cost increase
which lead to decline in profit of the firm. Thus, it is major risk which firm needs to addressed.
Strategies need to counter risk
In order to handle risks there are some of the strategies on which work need to be done.
Relevant strategies to business risks are given below.
Analytics: Firm need to follow a strategy under which it will focus on analytics services in its
business. Under this firm will establish contact with analytic firm that is USA based. When
business will be set up in Poland on daily basis data will be generated in business on sale of
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product and many other things (Bigliardi. and Galati, F., 2013). Relevant data will be send to the
analytic firm and will be analyzed by that firm. By using methods like market basket analysis
and cluster analysis as well as decision tree firm can determine the best product mix that it must
be followed to ensure that sales will be maximized and there will be less inventory in stock. Due
to less inventory storage cost will decline and profit will increase. In this way even economic
environment is not favorable for business firm though best product mix sales can be increased
and cost can be reduced which will lead to cost optimization in the business. It can be said that it
is one of effective strategy that firm can implement in its business. Analytic services in today
time period are used by most of business firms because it helps them in improving their business
performance.
Use of advanced technology: Advance technology can be used in the business and under this it
can purchase advance machines by using which product of the best quality can be prepared in the
business. There are number of firms that are making heavy expenditure on purchasing such kind
of machines because quality is the one of the factor that determine firm competency level in the
market. If quality of product is good then it can beat market (Verbeke and et.al., 2010). Opposite
to this, if quality is not good then firm will lag behind in competition. In this regard, coiling
machine can be purchased under which food processed items can be stored and same does not
rotten for long time period. Such kin d of advanced technology use lead to less wastage and
control on cost. All these things lead to increase in profitability of business.
Appointing economist in company Board of Directors team: As part of strategy firm can
appoint economist in its Board of Directors team. This is because in business there are number of
concepts of economics that are applied. If one have broad understanding of these concepts then it
can take decisions in right direction. Economists have broad knowledge of cost and they can
determine time where effort must be made to control expenses (Kher and et.al., 2013). Thus, on
time step can be taken to handle situation. Due to all these reasons appointment of economist in
business seem good strategy. Economist also understand economic environment in better manner
then other professionals. They can easily suggest changes that must be frequently made in the
company strategy so that according to change in economic environment business can be
adjusted.
Process reengineering: It is one of most important method that is used by the business firms in
their business. Under process reengeniering method entire process is analyzed deeply and areas
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where cost is increasing at fast rate is identified (Galizzi and Venturini, 2012). Mentioned
method is used at large scale by the business firms because each and every stage of production is
analyzed deeply under this method. Thus, point where cost increase at fast rate are easily
identified and removed. It can be said that implementation of process reengeniering method at
workplace will be effective for the firm and it will successfully will be able to control cost in its
business operations. All these things will lead to increase in profit in business.
Appointing new members in Board of Directors team: Under this strategy new members will be
added in Board of Directors team. Newly selected members will be those that have knowledge of
relevant domain to great extent (Papademas and Bintsis, 2010). It can be said that expansion of
Board of Directors team will prove beneficial for the firm and due to this reason it must
consistently focus on this strategy.
CONCLUSION
Based on the above report, it can be concluded that, Moulton is planning to expand its
business from US to Poland as well. Net present value based on different case scenarios have
been calculated. From the first case scenario, it can be inferred that, the project will prove to be
profitable but will not satisfy the expectations of the company. Hence, the entity should not
invest in it if there is a decrease in the inflation of Poland from 56% to 4%. From the second case
scenario it can be concluded that, the investment will prove to profitable if its sales revenue will
rise in 3rd, 4th and 5th year. In the end various risk have been discussed that might be faced by the
company which includes, economic risk, competition from the local sellers of Poland etc.
Several risk mitigation approaches such as, use of advanced technology, focusing on analytics
services etc., can be used by Moulton in order to cope up with it.
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