Project Risk and Financial Analysis Report: Apple Inc. Case Study

This report analyzes project risk management and financial strategies for Apple Inc. The report begins with an overview of project selection tools, emphasizing the use of Cost-Benefit Analysis, Payback Period, and Discounted Cash Flow methods. It details cost management processes, including resource planning, cost estimation, budgeting, and control. The report then explores project funding options, focusing on debt and equity financing, and the determination of an optimal capital structure. Part B includes a capital budgeting analysis, calculating Free Cash Flows, Net Present Value (NPV), and discussing the implications of different financing methods, such as funding through ordinary shares and bonds. The report concludes with recommendations for risk mitigation and financial decision-making within Apple Inc., highlighting the importance of socially responsible project closure.

Running Head: PROJECT RISK AND MONITORING 1
Project Risk and Monitoring
[Name of Writer]
[Name of Institution]

PROJECT RISK AND MONITORING 2
Part A:
Project selection:
Globalization has changed the way people think and act in organization. Tough local and
international competition among firms gave birth to different complex tools and techniques for
routine and non-routine decisions. Selecting any project with greater care can be source of
competitive advantage for the organization. Technology based organization go for more rigorous
techniques for selection of project.
Projects can be divided into two broad categories which are For-Profit projects and Not-
For-Profit projects. Apple Inc. is for profit organization and therefore the purpose of projects
initiated by Apple is to earn profit. There are many tools and measures that are used for selection
of project in Apple Inc. such as Cost-Benefit Analysis, Payback Period, Discounted Cash Flows
and Opportunity Cost method. Project selection tools enable organization to determine whether
particular project is profitable or unprofitable.
Cost-Benefit Analysis technique is widely used in technology industry to determine
profitability of any project. If cost of project overweight benefit project will be avoided and if
benefit overweight cost then project will be selected (Layard, 1994). Organizations implicit and
explicit costs and benefits for more accuracy. Those organizations which are interested in
recovering initial investment may prefer payback period. payback period is used to determine
time a project takes to recover initial investment. Projects with lower payback period are
preferred over high payback periods (Gorshkov, Rymkevich, Nemova & Vatin, 2014). Projects
that requires huge investment are analyzed with more complex capital budgeting techniques such
as discounted cash flow methods. Under the discounted cash method, expected cash inflow are
discounted to present value with discount rate or hurdle rate. Hurdle rate or discount rate is same

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as weighted average cost of capital of any organization. Discounted cash flow method is based
on time value of money instead of absolute value of money. Net Present Value (NPV) and
Internal Rate of Return (IRR) are project selection method based on discounted cash flow.
Opportunity cost method is used when organization needs to select one project among different
possible projects. Benefit of avoided projects or forego project is considered as opportunity cost.
This method is not used along but with other method such as discounted cash flow method.
Cost management:
Cost management can also be termed as survival skill of organization. In such a tough
competition cost management is replaced with strategic cost management. Strategic cost
management can be explained as management of cost in such a way that it does not affect
competitive advantage. Project cost management is very important for profitability of project.
Project cost management can be divided into four stages resource planning, cost estimating, cost
budgeting and cost control.
Resource planning stage requires identification of types of resources required and
quantity of each type of resource. Organization gathers historical information of similar projects
done or ask project managers to sort a list of resources required for project. Effective resource
planning is key to cost management at Apple Inc. (Apple Inc, 2018). In some projects
customized resource components are required therefore, management should carefully review
requirements of customized components.
Cost estimation is very important step of cost management to forecast the cost of each
type of resource required. Cost estimation process can be completed with the help of cost
management experts and reliable suppliers of the organization. Apple Inc uses customized

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components and obtain from loyal customers because customized components can affect
organizational performance (Apple, 2018).
Cost budgeting is process of allocating cost to each resource required. Cost budgeting
must be strong enough to avoid any deviation. Cost budgeting stage is directly related to cost
control because allocation of more budget will increase cost of the product and allocating less
budget will increase the deviation.
Cost control or cost monitoring is necessary for performance of cost management
process. Estimated cost can increase due to inflation or inaccurate estimation which is revealed
in this stage. Higher deviation from the estimated cost can yield low profits therefore, all stages
of cost management must be carefully conducted.
Project funding:
Although there are many options or alternatives available for project funding but
organizations strive for cheaper source of finance. Generally, large organization projects are
funded through debt financing and equity financing. These two broad categories are then divided
into many forms. Selection of project funding is made on according to organizational policies
and procedures. Apple’s financial statements for second quarter shows mixture of debt and
equity financing (Apple, 2019). Each source of financing has different implications and cost of
financing. Organizations prefer cheap sources of funding with soft repayment terms and
conditions. Debt financing provide tax shield and creditors are not given voting rights but
requires annual interest payment. While equity financing does not require annual payment but
shareholders hold the right to vote for any important decision.

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Given the different implications of sources of finance, organizations calculate optimal
capital structure. Optimal capital structure helps organization to determines the portion of each
source of finance to fund project. Optimal capital structure is combination of different sources of
funding with lowest average cost of capital.
Implementation and winding up:
Project implementation or project execution is started when all the requirements of
projects are complete. Apple Inc excessively use customized components for smart phone and it
is necessary to confirm supply before implementation. Once project is executed it cannot be
avoided because it involves infrastructure cost. Expected performance of customized
components must be matched with actual performance to avoid any delay in project life. Issues
in project implementation can increase project time and organization incur cost and sometime
leads to project failure.
Project is terminated when product manufactured or deliverable handed over to client.
Project closure is last step in project management which also involves cost and cost
consideration in this step is as important as in others stages. Wounding up project requires
resources shifting and releases working capital. Machinery which were purchased for project are
sold and any toxic material or vast is cleaned. Many project involve use of toxic or dangerous
components and proper dispose of is necessary step.
Conclusion and Recommendation:
Every step in project from project selection to project termination, risk is involved. To
reduce risk whether it is in form of monetary or goodwill, management should follow standard

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process. Project selection is first stage and it must be analyzed carefully before signing. Cost
management and project financing can increase cost and reduce profit. Project closure should be
based on the management policies and environmental issues should be avoided. Apple Inc must
finance its projects with equity because it is less costly. Apple Inc is a socially responsible
organization and invest large amount in corporate social responsible activities so it should focus
on project closure to avoid legal issue.
Part B:1:
No, Apple Inc is not facing equity capital issue rather realized an increase in equity
capital. Apple Inc is very stable organization and recognizes continuous increase in equity
instead of share price fluctuations. Compared to equity capital, debt financing is increasing in
Apple Inc’s capital structure which can be related to market growth. In September 2018 total
equity of Apple was $40,201 Million and in March 2019 it became $42,801 million (Yahoo
Finance, 2019).
Companies raise equity capital to finance market growth and new projects. Equity
financing is preferred over debt financing because it does not involve payment of interest. Equity
capital does not mature as debt and dividend payment is not mandatory requirement. On 3rd
January 2019, share price of Apple Inc reached to 142.19 compared to $157.92 one day earlier.
Next day share price of Apple Inc increased to $148.26. This reduction in share price can be
associated to rumors against Apple Inc.
Part B:2:

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i.
Free Cash Flows
Year Year 1 Year 2 Year 3 Year 4
Free Cash Flows
$1,243,000 $1,243,000 $1,243,000 $2,973,000
ii.
NPV of the project is $1,091,756.
iii.
According to NPV rule, if project yield positive NPV then project should be accepted. NPV
of this project is $1,091,756, therefore, this project should be accepted.
iv.
Funding through ordinary share is not a cheapest way but it is secure because required rate of
return of ordinary shareholders is always higher and there are no bankruptcy chances. If Apple
finances its project with bonds only then NPV will increase because debt financing provide tax
shield.

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References
Apple Inc., 2018. Financial Report 2018. Official Website of Apple Inc.
https://s2.q4cdn.com/470004039/files/doc_financials/2018/q4/10K_Q4FY18.pdf
Apple Inc., 2019. Financial Report 2019. Official Website of Apple Inc.
https://www.apple.com/newsroom/pdfs/Q2%20FY19%20Consolidated%20Financial%20Statements.pdf
Gorshkov, A.S., Rymkevich, P.P., Nemova, D.V. and Vatin, N.I., 2014. Method of calculating the payback
period of investment for renovation of building facades. Stroitel'stvo Unikal'nyh Zdanij i Sooruzenij, (2),
p.82. https://search.proquest.com/openview/89abae2d17dcf57ac9b1e4e62b98986a/1?pq-
origsite=gscholar&cbl=2026733
Layard, P.R.G., 1994. Cost-benefit analysis. Cambridge University Press.
http://eprints.lse.ac.uk/39614/1/Introduction_%28LSERO%29.pdf
Yahoo Finance., 2019. Balance Sheet of Apple Inc. From Official website of Yahoo
Finance.https://finance.yahoo.com/quote/AAPL/balance-sheet?p=AAPL