International Finance & Decision Making Report

International Finance & Decision Making

TABLE OF CONTENTS
INTRODUCTION.......................................................................................................................................................................................1
1. Critical evaluation of arguments utilized by Purchasing and Production Managers...........................................................................1
2. Important issues in the case and factors should be considered in financial analysis...........................................................................3
3. Decision of Morden Engineering with evidence from financial appraisal..........................................................................................4
4. Possible Risk of adopting recommendation and alternatives...............................................................................................................8
CONCLUSION............................................................................................................................................................................................9
REFERENCES..........................................................................................................................................................................................10

INTRODUCTION
Now-a-days, companies regularly focuses on innovation and advancement to win in the tough competition, however, such
decisions seems too complex because it requires huge investment and inappropriate decisions may significantly threaten the success of
the entity. Capital Budgeting techniques helps managers to determine the viability of a long-lived capital project such as new
equipment purchase, investment in new technology, product development and others. Morden Engineering is currently producing a
part of their product in their own production division with yearly volume of 100,000 items. However, recently, Clyde Engineer which
is a competitive manufacturer of these part came up with its offer to supply it at the cost of 83 pence each unit on per year renewable
contract basis. This assignment critically evaluates the proposal with different perspective of purchase and production divisional head
and applies different methods of capital budgeting so as to come to a final decision.
1. Critical evaluation of arguments utilized by Purchasing and Production Managers
Capital budgeting or investment appraisal is a process that determines the potential viability of a long-term investment project
like purchase of machinery, its replacement, research projects, new product development and others (Abor, 2017). The primary focus
of this is to maximize shareholder value by investing money in a highly profitable investment opportunity.
Current scenario reflects that Morden Engineering had previously purchase a new machine for £45,000 and used it to produce
a part of their product. However, recently, a tough competitor, Clyde Engineers had approached firm to sell the item at the cost of 83
pence each unit on renewable contract basis every year.
Machinery purchase cost 45000
Current production level 100000 per year
Machinery life (remaining) 8 years
Manufacturing cost 50 pence
Raw material 40 pence
Capital cost of machine 45000/9 = 5 pence
1