Managing Resources in the International Business Environment Assessment

Managing Resources in the International Business Environment

Task 1- Practicality of both projects in today’s globalization scenario

The world has experienced a rapid rate of globalization in the last couple of decades and has turned into a highly interconnected society which kind of made it obvious for business enterprises to come out of their armor and became globally active. An organization or business can no longer remain stuck or limited to doing business in their own country, in order to gain a large number of profits and to attain sustainable development, a company has to put its steps into the wide international market and think about expanding their businesses in a global market. The concept of globalization is bringing a new wave of opportunities for the growth and expansion of organizations in multiple sectors (Dube,2020). It is enhancing the market scenarios not only for the business alone but also for their own respective countries. The concept of globalization has impacted the economic growth and development of a country and it is because of the rapid expansion of the global market, a more and more sophisticated range of product lines is getting available in the market for consumers and this scenario is increasing the number of competitions in the business at a fast pace by making the market prioritize its consumers rather than following the same old seller-oriented approach. Therefore, an organization must expand its business operations in a much wide market by competing in the global scene and taking their game to a next level (Lechner and Boli,2020). And therefore, the investment opportunities in the USA and Europe should be scrutinized properly and if the opportunities are practical and have high profitability for their business operations then, they should be chased. In order to find the feasibility of the project, the methods of investment appraisal like figuring out the Net Present Value (NPV) can be used. The discount rate used should be proper for the calculation of the NPV. The discount rate is the rate of interest which is used for the calculation of the future cash flow’s present value. The discount rate taken here is basically the cost of capital of the investment because if an investment is unable to surround the cost of capital of the investment, then it might not be justified to take the decision of making an investment in the project.

Task 2

Before the start of a project, an initial investment is required to begin with the given project. The initial investment is in the outflow of cash at the beginning of the project from which the scrap value is deducted if any (Hering, 2021). The initial investment made here is pivotal because the organization has to make a choice whether or not it has the amount ready which is required for the financing of the projects. A project cannot begin without acquiring the initial investment.

Net Present value (NPV) is the present value of the project which is calculated at the present time. At first, the future cash flows are getting reduced after enabling a proper rate of discount, and then the cash inflows are added to it. If the resulting NPV is positive then the project investment decision is profitable but if it is negative then the project is not very practical to invest in and hence, it will not be a fruitful investment. The investment required for each project is 20 million USD and 20 million euros. The NPV of the USA project is negative 2054007.739 and the NPV of the Europe project is negative 2265741.911 with a discount rate of 10%. Further, it is required to be figured out which of these two has a more practical application for the organization. The rate of a particular country which is risk-free is needed to be examined as the discount rate and a markup of 2250 basis points are required to be added back to it. This basic point is taken as the premium of risk of a company for earning a profit over the rate which is free of risks. After gathering information from the internet, it is understood that the current rate of treasury bonds in the USA is 4.62 % and the EURIBOR in Europe is 5.48%.

Discount rate necessary for the USA project= US treasury bond rate _ 2.5%=4.62 + 2.5%=7.12%

Discount rate necessary for Europe project= Europe EURIBOR rate + 2.5%= 5.48% + 2.5%= 7.98%

So the discount rate is therefore properly determined. And hence, the NPV can now be computed properly.

Task-3

The NPV here is negative. Therefore, the organization has either of two options available, one is rejecting both of the projects as the projects are not able to satisfy the required rate of return. While the other option is further degrading the rate of return to a certain level that will make one of the projects suitable for investment (Itskhoki, 2021). So, if now the markup is considered to be 1.5% instead of 2.5% then the new discount rate will be

The new discount rate required for the USA project is 4.62%+1.5%=6.12%

The new discount rate required for the Europe project is 5.48%+1.5%=6.98%

Therefore, the new Net Present Value for both projects has been successfully determined and it has developed in the USA project helping it secure a positive NPV while the Europe project still has a relatively negative Net Present Value (Kashyap, 2020). The purpose of this is that the rate which is free of risk in the USA is less than that of Europe. The reason for this variation in risk rate is that the USA is far more developed when it is compared to Europe. So here, the USA benefited by having a low rate of return.

The exchange rates of a country are fluctuating and when that fluctuation goes for increases then a country can be affected by the sudden increase in two ways. Firstly, it depreciates its currency and the other goes for appreciating its currency. Both have their own strengths and weaknesses-

a) When the currency is acknowledged

It simply means that the value of the concerned country’s currency is more than that compared to another country. Here, the import of goods comes for a cheaper rate and the export becomes expensive.

b) When the currency gets depreciated

When the value of the currency of the concerned country is less as compared to another country then the currency goes under the title of depreciation. As the export of goods becomes cheaper and the import of goods gets expensive. This happens because the profit decreases. But as the investment is made in the global marketplace. Then, the risk of the exchange rate cannot be ignored (Ogawa, 2020). But it can be decreased to a certain degree by applying certain measures. One of the simplest of those measures is to deal only in US dollars and maintain every expense and revenue of the company in US dollars. Because of this, the risk can be passed on to the business associates which are situated abroad. Another option is to make currency advance agreements. The agreement is done between two entities to buy and sell a certain currency at the exchange rate which is in effect at the time.

Task-4

Therefore, after taking the above-completed calculations as the basis of this report, it can be vocalized that the project which is based in the United Kingdom is a more profitable investment when compared to the Europe project as it has a positive NPV which will be beneficial for the organization in their aim of expanding their business in the foreign market.

Reference List

Dube, S. ed., 2020. Enchantments of modernity: Empire, nation, globalization. Taylor & Francis.

Lechner, F.J. and Boli, J. eds., 2020. The globalization reader. John Wiley & Sons.

Kashyap, R., 2020. The economics of enlightenment: time value of knowledge and the net present value (NPV) of knowledge machines, a proposed approach adapted from finance. The BE Journal of Economic Analysis & Policy, 20(2).

Hering, T., Olbrich, M. and Rapp, D., 2021. Net present value, duration, and CAPM in light of investment theory: a comment on Kruk. Quarterly Journal of Austrian Economics, 24(2), p.25904.

Itskhoki, O. and Mukhin, D., 2021. Exchange rate disconnect in general equilibrium. Journal of Political Economy, 129(8), pp.2183-2232.

Ogawa, E., Shinada, N. and Sato, M., 2020. Japanese Companies’ Overseas Business Expansion and Impacts of Changes in Exchange Rate. Public Policy Review, 16(2), pp.223-248.

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