ABC Company: Improving Efficiency During Mining Process

Introduction. ABC Mining Company

One of the largest and most known mining companies in the United States. Currently involved in a process of investment discussion and decision-making based on the effectiveness estimation and probable revenue calculation. Constantly trying to achieve a higher position in the overall ranking of US mining companies, get a higher market share, and elevate above the majority of competitors.

Trying to enhance efficiency by investment into new machinery and equipment to provide faster delivery to their clients, get a more preferred position in comparison to the rivals. The implementation of such calculation methods as the payback period method and the time value of money.

Description of the Case Study

Goal: elevating above the company’s competitors in the market by enhancing efficiency in its extraction process.

Methods: the acquisition of the most advanced machinery and equipment in the sector (for example, new hydraulic mining shovels).

Main issue: the discussion by the board of directors whether investment in new equipment and technical machinery will increase the organization’s profit, popularity, and customer preferences or not.

Reason: the constant competition among mining companies worldwide for bigger market hare and increase in revenue. Therefore, the need to strengthen the position of the examined company on the market.

Hypothesis: the implementation of capital budgeting and the related methods as concepts for determining and estimating the correct decision.

Methods of Cost Calculation

The most essential question: will the investment in new machinery help generate more revenue and increase efficiency?

Capital Budgeting as a concept of support for the decision-making process and implemented using two diverse methods:

• Payback period method
• Time value of money method
• The overall characteristics of the payback period method:
• Helps in preparing against risk
• Prefers projects with cash inflows in initial rather than later years
• Is a method of liquidity

The overall characteristics of the tie value of money:

• Valuates investment opportunities
• Is a critical part of risk management and financial planning

The comparison and estimation of both methods being a key factor of making the right decision

Literature Review

Diverse factors influence the success of made decisions. Mostly such factors as micro and micro view of the economy, company, and polity along with project life and cost of the capital.

Factors functions:

• Project life – determination of the complete picture of the project.
• Cost of capital – a discounting factor

Payback period

One of the easiest and the most widely utilized methods or quantitative techniques for calculating capital budgeting.

Function: defines the number of years needed to get back the invested sum of money.

ABC company outlook: the number of years needed to return the investment in equipment and machinery.

Methodology and Results

When uniformity in CFAT – the first method applied (the original cash flow divided by the constant annual cash flow).

When no uniformity in CFAT – the second method applied (cumulating of CFAT until the time when cumulative cash flow equals to the initially invested amount).

Both methods’ result – payback period definition and calculation. => Management’s main role – the definition of the payback period and choice of the appropriate investment proposal based on the calculation results.

The observed tendency:

Duration < utmost acceptable duration = investment proposals accepted. Duration > utmost acceptable duration = investment proposals rejected.

Methodology and Results

The concept of the time value of money:

100$ now = 102$ in the future due to investment

BUT

0$ now = 100$ in the future => The worth on money right now ≠ not similar to what its future value will be.

Interest rates as the crucial factor defining the TVM are impacted by diverse factors:

The earnings the firm gets from investing the borrowed amount

The amount of funds the firm can borrow

Inflation

Risks involved in the project realization

The main reasons for the time value of money: the time difference, the decrease of the purchasing power, inflation, and related risks.

An important concept for choosing a project: the future cash flows’ obligatory transformation to present value which underscores the relevance of accuracy in setting discount rates.

Definitions

IRR – internal rates of return;

NPV – net present value

Additionally

High NVP = high success after investment

IRR > discount rate = high success after investment

Recommendation

Benefits of investment in the modification of the equipment and machines:

• The recovery of money within a short time period
• Success in the industry and higher customer preferences among competitors
• Time economy, increase in effectiveness
• High levels of customer satisfaction
• Decreasing number of advanced competitors
• Higher revenue due to increasing customer preferences
• Less time consumption for the delivery and production processes

Sum of investment: 10 000 000$; the amount of money earned per annum after the investment: 500 000$; recovery period: within two years after the investment.

In conclusion, investment in new machinery and equipment, as well as their modification, strongly recommended.

Discussion and Conclusion

1. A recommendation for the ABC Mining Company to invest in new machines and equipment, based on the study outcome.
2. A huge role of management and finance departments in estimation of the benefits and challenges of investment properly.
3. The payback period method as one of the most effective techniques of calculating the duration of investment return. In addition, widely utilized by diverse organizations and companies around the world.
4. Dependence of investment decision-making on diverse factors such as micro and micro view of the economy, company, and polity, or project life as a crucial factor.
5. The noticed diversity in payback period method calculation depending on the presence of uniformity in CFAT
6. The calculated outcome of 10 years of payback period for the ABC Mining Company returning 10 000 000 $ of investment

References

Almazan, A., Chen, Z., & Titman, S. (2017). Firm investment and stakeholder choices: A top‐down theory of capital budgeting. The Journal of Finance, 72(5), 2179-2228. Web.

Lima, A. C., da Silveira, J. A. G., Matos, F. R. N., & Xavier, A. M. (2017). A qualitative analysis of capital budgeting in cotton ginning plants. Qualitative Research in Accounting & Management. Web.