Decision Making & Problem Solving Presentation Mariyam Imna : ID 1414967 Charity Uloaku Nnah : ID 1417719 Emmanuel Olumide Akinlolu : ID 1414962

Decision Making & Problem Solving Presentation

Mariyam Imna : ID 1414967Charity Uloaku Nnah : ID 1417719 Emmanuel Olumide Akinlolu : ID 1414962

Appliance International Holdings

Objective of the presentation

• As dedicated and responsible Managers of a large Multinational manufacturer of white goods (Washing Machine & Refrigerators ) company we are here to present three options for the CEO with the support of a loan from UK bank .

What are White Goods ???

• They are electrical goods used for domestic purposes such as washing

machine , refrigerators – though it can differ :

• For example in United States the word white goods refers to linens

( Table cloth ) similarly in India white goods are referred as Durable

appliances and in general sometimes defined as domestic appliances

or consumer appliance ( Tuzkaya et al., 2011) .

To offer the 3 Options we will be considering the below factors

Financial Analysis

NPV

PAY BACK

IRR

ARR

Non- Financial Analysis

PESTEL

FIVE FORCES

VALUE CHAIN

Three Options will be provided to the CEO after doing

Appliance International Holdings Introduction

Range of 10 different models of Washing Machine & Refrigerators

2 Factories in

Poland

2,200 International Employees

Retail outlets in

Europe & Australia

Value Chain Analysis of Appliance International

Holdings (Koenig, 2012)

Note : All the relevant articles are cited in the reference list

HRM

• Employees are provided regular training• Engineers are free to develop ideas and work flexibly • Employees are encouraged to think innovatively and for developing new ideas they are rewarded

Technolog

y Departme

nt

• With the latest technology the products are more efficient and consumes less electricity• Special technology methods are adopted • Research and Development is treated as a priority in Appliance International Holding

Procureme

nt

• Negotiation are made with raw material suppliers for long term in order sustain and reduce cost occurred due to the changes coming to the market .

Marketing

& Sales

• Products are quality controlled• Bright colors are used to attract customers• The CEO of Appliance International holdings personally take part during promotions

Service

• 24 hours repair service • Offer 2 years of warranty• Provides after sales and personally the sales people visits the location to fix the products

Outbound logisti

c

• Products are provided through retailers and online via website• Spare parts are available online and in retail outlets

White Good Market Analysis !

TOP 10 Countries in the White Goods Industry

China

France

Germany Italy

Japan

Russia

South Korea

United Kingdom

United States

Turkey

Source Adopted from : (PRNewswire, 2014)

Market Share of the Top 10 countries in the White Good Industry

10%

11%

14%

14%16%

8%

5%

9%

7%6%

Germany

China

France

Italy

Japan

United States

South Korea

Turkey

Russia

United Kingdom

Leading Brands in the White Good Industry

Source Adopted from : ( Euromonitor International, 2009)

General Factors analyzed on European White Goods Market !

Factors analyzed

GDP Growth

Currency Inflation

Government Debt as of %GDP

Ease of doing business Index

Import and Export Value

Corporate Tax Rates

Global Emerging Economies

Source Adopted from : ( HedgeThink, 2014)

The Data is collected from Bloomberg’s own financial – market statistics , IMF and World Bank forecast – (Bloomberg Markets, 2013)

GDP Growth 2013 - 2017

China Turkey South Africa

Russia Poland South Korea

Mexico Brazil Chile Malaysia0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

45.9%

21.2%19.9%

26.6%

21.2%22.9%

17.5%15.6%

24.2%

21.8%

GDP Growth

Currency Inflation 2013 - 2017

China Turkey South Africa

Russia Poland South Korea

Mexico Brazil Chile Malaysia0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Inflation Rate

Government Debt as of % GDP 2013 -2017

China Turkey South Africa Russia Poland South Korea Mexico Brazil Chile Malaysia0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Government Debt

Business Possibility Index 2013 - 2017

China Turkey South Africa Russia Poland South Korea Mexico Brazil Chile Malaysia0

20

40

60

80

100

120

Business Rank


China Turkey South Africa Russia Poland South Korea Mexico Brazil Chile Malaysia

8.0%

27.0%

49.9%47.4%

86.0%

25.0%

83.0%

62.0%

47.0%

35.0%

7.3%

26.0%

67.3%

77.7% 78.0%

23.0%

50.0%

45.0%

19.0%

60.0%

Export Value Import Value

Emerging Economies in terms of Continent

Source : Adopted from (Lingaraja et al., 2014)

Analysis on Asian Continent

The Data is collected from Bloomberg’s own financial – market statistics , IMF and World Bank forecast – (Bloomberg Markets, 2013)

Factors analyzed

GDP Growth

Currency Inflation

Government Debt as of %GDP

Ease of doing business Index


Corporate Tax Rates

GDP Growth 2013 - 2017

China India Indonesia Korea Malaysia Philippines Thailand0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

45.9%

5.8%

31.3%

22.9% 21.8%20.4%

25.9%

Currency Inflation 2013 - 2017


1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

3.0%

6.5%

4.6%

2.9%2.5%

4.1%

2.7%

Government Debt as of % GDP 2013 -2017


10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

14.9%

67.7%

20.0%

27.3%

54.6%

36.8%

49.4%

Business Possibility Index 2013 - 2017

China India Indonesia Korea Malaysia Philippines Thailand0

20

40

60

80

100

120

140

160

91

140

128

8 12

138

18



10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Export Value Import Value

Corporate Tax Rates

14%

19%

14%

13%

14%

16%

11%

China India Indonesia Korea Malaysia Philippines Thailand

Source : Adopted from (Trading Economies, 2014)

General analysis on INDIA India’s economy reformed with rapid growth in recent years. Since 1991 it has

remained among the top 10% of the world’s countries in terms of economic growth (The World Bank, 2013)

India’s economy grew by 5.7% , this is the fastest pace in two and half years according to official estimate (BBC, 2014)

According to estimates India would require $400 billion worth of electronic by 2020 (Agarwal, 2014)

The economy was helped by strong growth in electricity , gas and water supply and financial services according to India’s Ministry of statistics (BBC, 2014) .

India’s new government with Narenda Modi as current Prime Minister has launched policies designed to encourage business investment including changes in tax such as working on minimizing the tax litigation (BBC, 2014).

Measures taken by Indian Government to Reduce the Government Debt

Indian New Government reveals reform budget- this plan includes increased

spending on infrastructure , spending on developing rural areas , lifting the cap on

foreign investments , cutting government debt and job creation attempting to

reduce the national budget deficit to previous administration’s goal of 4.1% of

GDP by the end of the year (Ludwig, 2014)

Government ordered a ban on first-class air travel by top bureaucrats to cut down

the unnecessary expenditure (DNA India, 2014)

Use of fuel for executives and deputy commissioner reduced to 200 ltrs from

400ltrs (DNA India, 2014)

Ministers are asked to reduce the non-plan expenditure such as purchasing new

vehicles , creating new posts and holding conferences at five-star hotels (DNA

India, 2014)

Climate in India

India is a large country , the climate of India is

dominated by the great wind system known as

the asiatic monsoon.

The Nothern Mountains : This region

includes the Himaliya’s and their foot hills .

Rain occurs all year around.It can get quite

HOT before the burst on Monsoon.

The Nothern Plains: This is the region

extending to Punjab to the Gangas delta , this

low lying region is every where HOT and

generally dry.

The Rajestan Desert : This is the eastern part

of India called the thar of Great Indian Desert . This is one of the HOTTEST. Source : Adopted from (BBC, 2012)

Purchasing Power in India

India has emerged as the 3rd largest

economy in the world , ahead of

japan based on the purchasing power

(Reuters, 2014)

The emerging Indian middle earns modest sums $1.70 to $5 per capita per day – they

have collectively large consumer power

(NDTV, 2012)

The spending power of Indian consumers are expected to be more than $ 1

trillion by 2021(NDTV,

2012)

By 2020 India will gave more younger

population with stronger consumer

economy (The Times of India ,

2011)

India’s positive growth surprise: GDP in

India grew 4.8% accelerating from 4.3%

This outcome was much better than

expected, with consumer spending,

investment and exports all making

positive contributions

Source : Adopted from (Memani, 2014)

Demand for White Goods In INDIA

Source : Adopted from (Corporate Catalyst India Pvt Ltd, 2014)

Overview of White Goods Market in India

In rural markets , White goods like refrigerators and consumer electronic goods like to witness high demand because the government of India plans to invest significantly in Rural electrification.

The White goods sector was ranked in revenues worth $ 7.3 billion in year of 2012.

Urban markets account for the major share of 65% of total revenues in white goods market.

There is huge demand for refrigerators , AC’s and other electronic goods in the coming years. Source : Adopted from (Corporate Catalyst India Pvt Ltd, 2014)

Leading Brands of White Goods In India and their Market Share

25.00%

40.00%

30.00%

27.19%

15.00%

35.33%

30.77% Whirpool

Symphony

Bluestar

Hitachi Home

IFB Industries

Lloyd Electric

Feddes Lloyd

Source : Adopted from Moneycontrol & Bloomberg, 2014)

Modified Porters Fives Forces integrated with PESTLE -Analysis

on India (Porter, 2008) .Note : All the relevant articles are cited in the reference list

Financial Analysis of Appliance International

Holdings for CEO

Lending limit for UK loan

• For a large multinational manufacturing company trying to get a loan from a UK bank, the bank gives the company a limit of 4 (four) million Britain pounds (US $6,374,500 million) – (TopLoanDeal.co.uk, 2014)

Best Financial Institution Loan Dealers in UK

Precise Mortgage

Nemo Personal Finance

Prestige

Shawbrook

Source : Adopted from (TopLoanDeal.co.uk, 2014)

Analysis of the Financial Institutions

Institution Loan Type Loan Amount Annual interest

Rate

Loan Term

Precise Mortgage

Secured (Max. LTV 65%)

£50,001-150,000 5.45% 3-30 years

Nemo personal Finance

Secured (Max. LTV 55%)

£30,000-200,000 5.50% 3-25 years

Prestige Secured (Max. LTV 50%)

£100,000-2,500,000 6.5% 3-25 years

Shawbrook Secured (Max. LTV 65%)

£100,001-150,000 6.9% 3-25 years

Source : Adopted from ( Money.co.uk, 2014)

Based on the analysis, the CEO should consider

taking a loan from “Prestige” because they offer a

loan at a range of £100,000-2,500,000.

Appliance international holdings decided to go for an

initial investment of US$2,000,000 (based on the

average initial investment used by the leading white

goods companies)which falls in the range of the loan

being offered by Prestige Financial Institution.

Machines have become a part and parcel of modern life. They have revolutionized

the methods of production and increased productivity, production and income,

thereby leading to a rapid economic growth.

New Modern Production Methods that Cut Cost and Reduces Labor

The Most Adopted Method for Manufacturing

• Most famous manufacturers makes use of “LEAN” in manufacturing their product which helps such manufacturers cut cost and reduce labor.

Source : Adopted from ( CMTC Creating Solution , 2012)

The “6 Motion Direct Drive Washing Machine” has up to 12 KG

loading capacity .

Ability to identify the type and quantity of fabrics during the washing

cycle and deal with each type separately.

This device is also endowed with a Steam engine that kills up to 99.9%

of the bacteria and viruses that stick to the clothes on a daily basis,

making it the most perfect washing machine for children clothes that

eliminates the risk of catching allergies.

Washing Machine

Source : Adopted from ( RAGMAG Magazine , 2014)

Refrigerator

The “Hygiene Fresh Refrigerator” boasts hygiene fresh characteristics that keep

the fruits, vegetables and all kinds of food inside the fridge sterilized.

This exceptional product enjoys a four stage filtration system that works at

reducing the bacteria presence in the fridge by 99.99%, thus eliminating fungi

and unpleasant odours in the refrigerator.

The same standard size from the outside as any other refrigerator, “Hygiene

Fresh Refrigerator” enjoys more space on the inside, since the wall material is

compressed and hardened rendering it more solid and less space consuming.

Finally, it will includes an “Inverter Linear Compressor” that saves power by

26% and has greater durability and reliability.Source : Adopted from ( RAGMAG Magazine , 2014)

Benefits of using Lean Manufacturing Techniques

Improved productivityReduced wasteImproved lead timeImproved stock turns

Source : Adopted from ( Arindam Nag, 2012)

Techniques Used for the Financial Analysis

Payback period (discounted and non-

discounted) .

NPV (Net Present Value).

IRR (Internal Rate of Return).

ARR (Accounting Rate of Return).

Option One (1) Assumptions

Discount rate - 6.5%

Reduction of staff is 500 due to the new modern method of production introduced .

Average monthly compensation for production workers - $150

Cost of acquiring the machines for both factories are - $2,000,000 Installation cost - $16000

Annual depreciation policy - 7%

The machines will have a life span of - 8years

Scrap value after 8 years using straight line depreciation method - $140,000

Calculation for Non-discounted Payback Period

Y0$

Y1$

Y2$

Y3$

Y4$

Y5$

Y6$

Y7$

Y8$

Acquisition cost 2,000,000

Installation cost 16,000

Initial investment (2,016,000)

Cash flow 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000

Scrap value 0 0 0 0 0 0 0 140,000

Net cash flow (2,016,000) 900,000 900,000 900,000 900,000 900,000 900,000 900,000 1,040,000

Payback period -1,116,000 -216,000 -

The Investment will be realized in 2 YEARS & 3MONTHS

Calculation for Discounted Payback Period

Y0$

Y1$

Y2$

Y3$

Y4$

Y5$

Y6$

Y7$

Y8$

Initial investment (2,016,000)

Discounted cash flow 845,070 793,651 745,033 699,844 656,934 616,861 664,697 543,807

Scrap value 0 0 0 0 0 0 0 140,000

Net Discounted cash flow (2,016,000) 845,070 793,651 745,033 699,844 656,934 616,861 664,697 683,807

Payback period -1170930 -377279

The Investment will be realized in 2 YEARS & 6 MONTHS

Calculation for Net Present Value (NPV)

Y0$

Y1$

Y2$

Y3$

Y4$

Y5$

Y6$

Y7$

Y8$

Cash inflows (2,016,000) 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000

Scrap value 0 0 0 0 0 0 0 140,000

Net cash flow (2016000) 900,000 900,000 900,000 900,000 900,000 900,000 900,000 1,040,000

Present value 845,070 793,651 745,033 699,844 656,934 616,861 664,697 628,399

Sum of PV 5,650,489

Net present value 3,634,489

NPV is positive (ACCEPT) because return is greater than cost

Calculation for IRR & ARR

Y0$

Y1$

Y2$

Y3$

Y4$

Y5$

Y6$

Y7$

Y8$

Cash flow (2,016,000) 900000 900000 900000 900000 900000 900000 900000 1040000

Depreciation (234500) (234500) (234500) (234500) (234500) (234500) (234500) (234500)

Accumulated cash 665500 665500 665500 665500 665500 665500 665500 665500

Average profit 665500

ARR 33%

Based on the initial investment , the IRR is 42%

Option Two (2) Assumptions Initial investment - $2,016,000


Tax rate 18%

The sales of refrigerator and washing machine will increase to 400 units on each of the product.

The outlets will be used for 12 years

After 12 years will have a scrap value of $170,000

The average price for the first 4 years on the refrigerator and washing will be $ $316 and $387 respectively.

After 4 years it will be sold for $340 and $410 respectively.

Operating expense is $50,000

Tax rate 18%


Y0$

Y1$

Y2$

Y3$

Y4$

Y5$

Y6$

Y7$

Y8$

Y9$

Y10$

Y11$

Y12$

Selling price 703 703 703 703 750 750 750 750 750 750 750 750

Cash flow (2,016,000) 562,400 562,400 562,400 562,400 600,000 600,000 600,000 600,000 600,000 600,000 600,000 600,000

Scrap value 0 0 0 0 0 0 0 0 0 0 0 170,000

Net cash flow (2,016,000) 562,400 562,400 562,400 562,400 600,000 600,000 600,000 600,000 600,000 600,000 600,000 770,000

Payback period (1,453,600)

(891,200)

(328,800)

The Investment will be realized in 3YEARS & 7MONTHS


Y0$

Y1$

Y2$

Y3$

Y4$

Y5$

Y6$

Y7$

Y8$

Y9$

Y10$

Y11$

Y12$

Selling price 703 703 703 703 750 750 750 750 750 750 750 750

Discounted cash flow (2,106,000) 528,075 495,944 465,563 437,325 437,956 411,241 386,100 362,538 340,329 319,659 300,150 281,822

Scrap value 0 0 0 0 0 0 0 0 0 0 0 170,000

Net Discounted cash flow (2,106,000) 528,075 495,944 465,563 437,325 437,956 411,241 386,100 362,538 340,329 319,659 300,150 451,822

Pay back period (1,577,925)

(1,081,981) (616,418)

(179,093)

The investment will be realized in 4 YEARS & 5 MONTHS


Y0$

Y1$

Y2$

Y3$

Y4$

Y5$

Y6$

Y7$

Y8$

Y9$

Y10$

Y11$

Y12$

Selling price 703 703 703 703 750 750 750 750 750 750 750 750

Cash flow (2,016,000) 562,400 562,400 562,400 562,400 600,000 600,000 600,000 600,000 600,000 600,000 600,000 600,000

Scrap value 0 0 0 0 0 0 0 0 0 0 0 170,000

Net cash flow (2,016,000) 562,400 562,400 562,400 562,400 600,000 600,000 600,000 600,000 600,000 600,000 600,000 770,000

Present value 528,075 495,944 465,563 437,325 437,956 411,241 386,100 362,538 340,329 319,659 300,150 281,822

Sum of PV 4,766,702

NPV 2,750,702


Y0$

Y1$

Y2$

Y3$

Y4$

Y5$

Y6$

Y7$

Y8$

Y9$

Y10$

Y11$

Y12$

Depreciation (153,833

) (153,833) (153,833) (153,833) (153,833) (153,833) (153,833) (153,833) (153,833) (153,833) (153,833)(153,833

)

Expenses (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000)

Accumulated cash 358,567 358,567 358,567 358,567 396,167 396,167 396,167 396,167 396,167 396,167 396,167 396,167

Average profit

383,634

ARR 19%

IRR is 27%

Option Three (3) Assumptions

Acquisition cost of the machines -$2,000,000

Installation cost -$16,000

Average monthly compensation for production workers - $150

Tax rate 18%


Scrap or salvage value of the machine-$140,000

Life span of the machinery will be for 8 years

The Air conditioner will be sold at -$ 370 in the first 3 years and thereafter sold at $420.


Y0$

Y1$

Y2$

Y3$

Y4$

Y5$

Y6$

Y7$

Y8$

Selling price 370 370 370 420 420 420 420 420



Cash flow (2,016,000) 666,000 666,000 666,000 756,000 756,000 756,000 756,000 756,000

Scrap value 0 0 0 0 0 0 0 140,000

Net cash flow (2,016,000) 666,000 666,000 666,000 756,000 756,000 756,000 756,000 896,000

Payback period (1,350,000) (684,000) (18,000)

The investment will be realized in 3 YEARS & 7 DAYS


Y0$

Y1$

Y2$

Y3$

Y4$

Y5$

Y6$

Y7$

Y8$

Selling price 370 370 370 420 420 420 420 420

Cash flow (2,016,000) 625,352 587,302 551,325 587,869 551,825 518,163 486,486 456,798

Scrap value 0 0 0 0 0 0 0 140,000

Discounted cash flow (2,016,000) 625,352 587,302 551,325 587,869 551,825 518,163 486,486 596,798

Payback period (1,390,648) (803,346) (252,021)

The investment will be realized in 3 YEARS & 5 MONTHS


Y0$

Y1$

Y2$

Y3$

Y4$

Y5$

Y6$

Y7$

Y8$

Selling price 370 370 370 420 420 420 420 420



Cash flow (2,016,000) 666,000 666,000 666,000 756,000 756,000 756,000 756,000 756,000

Scrap value 0 0 0 0 0 0 0 140,000

Net cash flow (2,016,000) 666,000 666,000 666,000 756,000 756,000 756,000 756,000 896,000

PV 625,352 587,302 551,325 587,869 551,825 518,163 486,486 456,798

Sum of PV 4,365,120

NPV 2,349,120


Y0$

Y1$

Y2$

Y3$

Y4$

Y5$

Y6$

Y7$

Y8$

Deprecation (234,500) (234,500) (234,500) (234,500) (234,500) (234,500) (234,500) (234,500)

Accummulated cash 431,500 431,500 431,500 521,500 521,500 521,500 521,500 521,500

Average profit 487,750

ARR 24%

IRR is 31%

Financial EvaluationFinancial

Analysis/optionsOption 1 Option 2 Option 3

Non-discounted Payback period

2years3months 3years7months 3years7days

Discounted Payback Period

2years6months 4years5months 3years5months

Net Present Value $3,634,489 $2,750,702 $2,349,120

Internal Rate of Return

42% 27% 31%

Accounting Rate of Return

33% 19% 24%

Decision Analysis Tool for Comparing the Options

Financial Techniques/Options

Option 1 Option 2 Option 3

Non discounted Payback period

10 3 5

Discounted Payback period

10 3 5

Net Present Value 10 5 3

Internal Rate of Return

10 3 5

Accounting Rate of Return

10 3 5

Total 50 17 23

A scale of 3-10 was used to evaluate the best option as follows:Worst case -3Moderate case -5Best case -10

Long Term Profitability



Net Present Value (NPV) $3,634,489 $2,750,702 $2,349,120

Internal Rate of Return (IRR)

42% 27% 31%

Accounting Rate of Return (ARR)

33% 19% 24%

The CEO should consider the following techniques :



Net Present Value (NPV) 10 5 3

Internal Rate of Return (IRR)

10 3 5

Accounting Rate of Return (ARR)

10 3 5

Total 30 11 13

Using decision matrix tool for Comparison

Short Term Profitability

Financial Analysis/options



2years3months 3years7months 3years7days


2years6months 4years5months 3years5months

Financial Analysis/options



10 3 5


10 3 5

Total 20 6 10

The CEO should consider the following techniques :

Using decision Matrix tool for comparison

Recommended Option The CEO is advised to go for option one (1) based on the following decision

matrix:

The Non-discounted and discounted payback period is will be realized in a short period of time.

Though the NPVs are positive, but option one has the highest NPV figure.

The IRR if far greater than the cost of capital which is 6.5%.

Though the ARR is to be greater than the IRR, but option one has the closest highest percentage rate.

Option one is recommended both for short and long term profitability.

How to over come Challenges

Documents

Decision Making & Problem Solving Presentation Mariyam Imna : ID 1414967 Charity Uloaku Nnah : ID 1417719 Emmanuel Olumide Akinlolu : ID 1414962