Investment Appraisal Under Uncertainty

Topics: Net present value, Internal rate of return, Investment Pages: 8 (2387 words) Published: April 30, 2013
Investment Appraisal under Uncertainty

Question a
Internal Memo Date: November 15, 2012

Subject: Investment report

To: Mr. Michael the Chief Engineer
Mr. Richard the accountant
Mrs. Rachel the economist
From: Alex the Managing Director

Hello, everyone, I would like to present an introduction and brief description of the investment project to you, and wish to make sense as much as possible. To begin with, this project is about creating an online-based business that specializes on consumer goods such as fashion garments, imported electronic products and food, nutrient products and many others like that. Generally speaking, all kinds of products have to be easily stored, delivered and legally accepted by both Hong Kong and China mainland government. Probably, some of you may wonder why we need to enter an online market for consumers, since there are too many players already and the profitability rate might be squeezed out by those first movers. Apart from, you may think that we have US$ 5,000,000,which could either create a unique business or enable to enter some business areas with large amount of initial capital requirement but higher profitability guarantee.

In response, I would like to explain the reasons why this investment project could be a good business opportunity for us, and the predicted net cash flows would be substantially and sustainability. In the first place, it is necessary to emphasize that we aim to construct a solid electronic business platform that base in Hong Kong but primarily focuses on China mainland market. More importantly, we might need to invest a substantial number of money on supply chain management, marketing, channel constructions and our own logistic networks. There are so many reasons to support why we have to focus on China mainland consumer goods market, not only the second largest economy in the world or the two digits or highly one digit rate of economic growth rate for past and following decades, but the really strong demands from 1.3 billion people for nearly all kinds of durable products with good quality from all over the world. Besides, Hong Kong has a unique advantage in transferring products from rest of the world to mainland due to a set of political, economic and cultural considerations, in other words, the choice of headquarter in Hong Kong could bring a set of benefits in terms of favored duty policies, transportation advantages and receiving latest market information or chasing new business opportunities.

More specifically, our targeting customers are those young people and couples with good education background (generally bachelor degree or above), reasonably good household income (Approximately 10,000 RMB in terms of 1,000 pounds), and they are engaged on chasing high living standards. The reasons are simply summarized that they have a relatively strong purchasing power with open-minded characteristics. Correspondingly, the categories of products in our online stores needed to be more specified as the range of medium between top grades of products in order to satisfy the preferences of that group of customers, and we also need to import a large volume of stocks. Meanwhile, it is necessary to construct a very stable and efficiently online platforms, in other words, a friendly and popularity website is essential to the success of our business, which means a large amount of money needed to be invested for technical preparations and operations.

In terms of the vision of business strategy in our company, it might be summarize as the Hong Kong based investment company that focuses on chasing the business opportunities from key emerging markets, especially in the Asian-Pacific region. It is because that Hong Kong is famous for international free port, one of the most important financial centers in the world and also has many particular links with mainland China or other countries in...

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