Question

You are the chief financial officer​ (CFO) of Morb​ lights, a manufacturer of lighting components for cars. The board of directors have decided that there is a need to divert investments towards​ LED-based lighting solutions instead of traditional light bulbs. You are currently evaluating two alternative projects. The first is to integrate new technology in the existing​ factory, where the cash flows for the first 4 years will be below average as the production will be affected due to refitting of facilities.​ However, from year​ 5, it will increase to​ above-average levels once full capacity is achieved. The second project is to take over an existing small business with the required production facility. This is expected to increase cash flows to​ above-average levels immediately for the next 4​ years, but decrease to​ lower-average cash flows from year​ 5, when the​ factory's technology becomes outdated.

How do you choose from the two available​ options? Given the strategy of the​ firm, what other factors need to be taken into consideration for this​ decision?

Answer 1

To choose between the two investment options, the CFO should perform a cost-benefit analysis using NPV or IRR, assess the strategic alignment with long-term goals, examine the risk and liquidity factors, and explore the options for raising necessary financial capital including investors, profits, borrowing, or stock.

Step-by-step explanation:

When choosing between the two available options for investing in LED-based lighting solutions, the chief financial officer (CFO) should consider a variety of financial factors. Firstly, a cost-benefit analysis should be conducted which would take into account the present and future cash flows of both projects, adjusting for the time value of money through a method like net present value (NPV) or internal rate of return (IRR). Moreover, the CFO should consider the strategic fit of the investment with the company's long-term goals, the potential risks associated with each option, and the liquidity position of the company.

Beyond the direct financial comparisons, the CFO should also take into account the company's ability to raise the necessary financial capital to fund the project. This could involve consideration of early-stage investors, reinvesting profits, borrowing, or selling stock, each with their own costs and implications for company control and financial flexibility.

Lastly, it is essential to consider any additional benefits or synergies that could be expected from either project, such as increased market share, technological advancements or the ability to adapt to changing market conditions. The decision-making process may also involve conducting scenario analysis, understanding the competitive landscape, and considering the regulatory environment.

Answer 2

The CFO of Morb Lights must analyze the present value of future cash flows, alignment with long-term strategy, cost of investment, and potential for technological upgrades when choosing between integrating new technology into an existing factory or acquiring a small business. Additionally, the selection of financial capital sources like investors, reinvestment, loans, or stock issuance is crucial.

Step-by-step explanation:

As the chief financial officer (CFO) of Morb lights, choosing between two investment options requires a comprehensive analysis. The first option involves integrating new technology into the existing factory, which would lead to cash flows below average for the first 4 years due to disrupted production, but would yield above-average cash flows from year 5 onwards. The second option is to acquire a small business capable of immediate above-average cash flows for 4 years but expects a decline from year 5 as the technology becomes outdated.

When evaluating these options, the firm must assess factors including the present value of future cash flows, the potential for future technological upgrades, the cost of both investment and integration, and how it aligns with the company's long-term strategy. Additionally, the company should consider various sources of financial capital such as early-stage investors, reinvesting profits, borrowing, or issuing stock and how these will affect the company's growth and financial health. Understanding the company's ability to secure financial capital and manage it effectively is essential for long-term viability and success.