Tovell plc is an industrial company that manufactures kitchen furniture. The company wants to relocate its operations to a new area to guarantee maximum profits and enhance competitiveness. Tovell plc has to decide between buying another company in the United States and setting up a manufacturing subsidiary in Germany. The report below is meant to assist the company’s senior managers in their decision-making process. The report focuses on an assessment of the potential advantages and disadvantages of the two probable locations. Similarly, a numerical analysis and an assessment of the relevant financial and political risk factors of the two locations are highlighted in the report.
A summary and overall recommendation
Currently, the company’s executives have noted that they have minimal chances of increasing their sales in the United Kingdom. Similarly, the team has noted that exporting furniture in the UK is not economically productive owing to the high cost of transportation. Based on the analysis undertaken in parts A, B, and C, it is apparent that the company should set up a manufacturing subsidiary in Germany rather than buying another company in the United States. By manufacturing a new facility in Germany, the company will be able to build a subsidiary that completely addresses the firm’s needs and operation principles. It is cheaper to construct a new facility in Germany than acquiring an existing firm in the United States.
Limitations of my evaluations
With respect to the numerical analysis undertaken using a discounted cash flow approach, it was realized that it was more appropriate to invest in the US than investing in Germany. As such, the net present value of investing in Germany was ￡-3601.124367*103. The net present value of investing in the United States was ￡8.399017m. Since the net present value of investing in the US is positive, unlike in Germany, the company should acquire another firm there. It should be noted that the net present value should not be used alone as a determining factor on where to invest. The tool should be used in conjunction with other assessment tools to identify all the risks as done in the case study. Since the total risks of investing in the USA are more than the risks of investing in Germany, the company should consider setting up a manufacturing subsidiary in Germany.
While analysing on the advantages and disadvantages of the two options, it was found that the forecasted costs seem to be balanced for the first two years of the project in Germany. Tax allowable depreciation in Germany for machinery was also noted as a positive aspect for decreasing the overall end tax for the company. Within the European Union and Euro zone, it is possible to respond immediately to the threats of inflation. On the contrast, the company should not acquire another firm in the US because large investments will be required to start the operations. As such, the company should invest more than $20 million in the business in the United States during one year. In addition, the risk of losses is also high. Therefore, Tovell plc should establish another firm in Germany.
Assessments and other considerations
Concerning financial and political risk factors, it is ideal for the company to set up a manufacturing subsidiary in Germany rather than buying another company in the United States. Germany has very low levels of both political and financial risks. The country is ranked as the fourth largest global economy. According to the IMF, the country’s economy will accelerate between 1.7% and 1.2% in the next few years. The growth of investment in Germany has proven to be sensitive to policy uncertainty. Rigorous lending standards combined with new regulations and tighter credits have been the impediment to the growth of Germany’s economy.
Economic risks in the United States include worries that the dollar may dive due to the rapid growth of budget deficits and the inflation. The Federal Reserve is flooding the financial system with money because of the radical moves. On the other hand, political risks have attracted increasing attention of investors in the United States. The above has been witnessed because the government plays a crucial role in private companies due to the financial crisis. Investors are always watching the state intervention in economic affairs because they need to make a decision on where to allocate money. Political risk is becoming more and more serious in the USA as some investors see the random intrusion of the government in business affairs. Investors are concerned that policies could influence their risk premium demand of the before they buy stocks or bonds or do a business deal. This could result in the USA losing its competition and money could flow elsewhere. Owing to the above illustrations, the company should set up a manufacturing subsidiary in Germany rather than buying another company in the United States.