The expansion of an organization is always associated with potential risks and requires careful examination of the financial framework. ZXY is a food supply company that is planning on introducing the development of two new products, as well as expanding to a second production facility that the company is considering to rent. The new products are food staples that hold steady consumer demand. The expansion under consideration will require an investment of $7,000,000 for equipment that has a life span of ten years, after which it is expected to be sold for $1,000,000. Additionally, the company requires a twelve percent return on investments. This paper aims to analyze the financial information and risks associated with investment to expand ZXY Company, as well as propose a recommendation on whether to invest in expansion.
To begin with, the data that is provided is the forecasted data. The true numbers may vary if the organization decides to implement the proposed project. For example, more commodities might be used, more employees are hired, or the taxes may increase. Thereafter, the organization needs to keep in mind that these are forecasted numbers that may not be accurate once the project is put into action. Additionally, the risks of inflation might cause the estimated figures to rise again above what was originally calculated. Lastly, the return on investment is forecasted to be 16.2 percent. However, ZXY Company has requested the return on investment to be 12 percent. While this seems rather appealing, the project will not start to generate revenue until the third year of the project implementation, and the cash flow will not increase until the fourth year of implementation.
Another vital factor that should be considered is the overall instability of the current situation. All spheres of the economy report a significant change in their income and financial resources. The pandemic and specific measures used by the government to regulate the situation introduce new limits that should be considered by actors (Tran, 2020). For this reason, it is possible to state that companies working in the food supply field also face numerous challenges and problems linked to the need to function under new conditions. For ZXY, it means that the expansion and the planned investment should be analyzed in terms of the fast-changing environment. Planning such significant alterations and new entries, it is recommended to consider all risks caused both by external and internal factors (Tran, 2020). For this reason, the pandemic and multiple adverse effects caused by it on the economy should be taken into account.
In such a way, it is possible to report the existence of significant market risk. The planned investment might decline in value or even lost their value completely because of the economic developments and recent events affecting the whole market (Kotler & Keller, 2014). The example of the 2008 financial crisis demonstrates that the alteration in the current market environment preconditioned the reconsideration of existed patterns and a decrease in the value of multiple investments. With the complexity of the situation observed today and the absence of clear forecasts about the end of the pandemic and its estimated impact on the global economy, a significant investment can be viewed as a too risky step because of the high risk of losing value and being not able to return investment in long and short runs.
Additionally, for ZXY, it is vital to take into account the current level of rivalry and the functioning of other companies belonging to the sphere. The investment in further expansion and the need for future repayment presuppose that the company will continue its evolution and remain capable of generating additional income and value (Jordan et al., 2017). For this reason, the current market analysis by using effective evaluation tools should be performed to analyze the resources of the closest rivals and their ability to attract the target audience and reduce revenues expected by ZXT. Thus, as far as the planned investment is focused on the further development of the company and generation of the competitive advantage by introducing new lines, financial risks can be mitigated by the provision of new services to clients and the ability to attract them by new proposals.
Altogether, analyzing the situation peculiar to ZXT company and its planned investment, it is possible to provide the following recommendations. The company will have to return 12 percent on investment, which might be challenging as the value can be generated starting the third year. Additionally, there are significant risks caused by the pandemic and the changes in the economy. For this reason, there is a high risk of a reduction in the investment value because of the inability to forecast all possible changes. It can be recommended to perform additional analysis of the market and the emerging economic trends to ensure that the planned expansion will meet the strategic goals of the company and will result in its further evolution. Considering the factors mentioned above, the current decision to invest in expansion can be too risky because of the vagueness related to the further growth of the market.
Jordan, B., Miller, T., & Dovin, S. (2017). Fundamentals of investments: Valuation and management (8th ed.). McGraw-Hill Education.
Kotler, P., & Keller, K. (2014). Marketing management (15th ed.). Pearson.
Tran, H. (2020). Economic and financial risks after the pandemic. Atlantic Council.