Capital Budgeting Analysis

Document Type:Case Study

Subject Area:Economics

Document 1

The process of investing in the international levels calls for close analysis of the prevailing conditions in the foreign countries. In this case, we evaluate the capital budgeting investment of Apple Limited Company in the United Kingdom. The company has been operating effectively in the American market and now seeks to expand some of its new commodities in the United Kingdom. The goal is to maximize the value of return on the untapped market in the country. UK is a country with attractive economic conditions such as low inflations, a low level of balance of payments, and strong current and reduced impact of the external economic influence. 619 trillion USD in the year 2016 according to the data by the World Bank. Title BoP: current account balance as per cent of GDP CDID AA6H Source dataset ID UKEA Release date 29-06-2018 Next release 28 September 2018 2007 Q1 -3.

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6 2007 Q2 -3. 1 2007 Q3 -4. 3 2007 Q4 -3. 9 2010 Q3 -4. 0 2010 Q4 -3. 7 2011 Q1 -1. 7 2011 Q2 -0. 7 2011 Q3 -3. 5 2014 Q2 -4. 1 2014 Q3 -5. 0 2014 Q4 -6. 1 2015 Q1 -5. 3 2015 Q2 -3. 8 Source: Ons. gov. uk, 2018 The forecasted impact of Brexit on the UK's economy A close view shows that the United Kingdom has maintained a trade deficit in the last decade. There is hence an indication that the value of the imports was greater than that of the exports. It might be a good opportunity for the investment of Apple Limited Company, since the market seems to be ready for high consumption. Current Fluctuation and Impact of Trends The amount of the current account for the UK stood at £23. 2 billion in the year 2017 which was 4. 6 percent of the GDP of the country.

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From April to June in the year 2017, there was a widening gap of close to £1. 0 billion from the deficit of £22. Effect of Interest Rates The economy of the country is also affected by the interest rates. According to the financial analysis of the country for the last ten years, there was a decline in the official band rates. There was an increase from 0. 25 percent to around 0. 5 percent in the year 2017. The level of inflation is also expected to raise to 2. 7 percent due to high production costs of household commodities such as fuel and energy. The cost of living is however, expected to remain unchanged despite many economic down turns in the country. Apple Limited Company will be a in a good position to expand its operations to the UK market since the country is not affected negatively by the inflation.

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According to the data provided, the value of the UK FDI assets rose in the year 2017 by £65 billion to net value of £1,416 billion in the month of January to March. In this case, we examine the exchange rate forecast using parity conditions (Ward, 2005). Parity simply means the rate of exchange between two currencies making the power of purchase to be substantially equal. They are set at parity of adjusted to maintain parity as per the prevailing economic conditions. Month Open Low-High Close Mo,% Total,% 2018 Jul 1. 3% Aug 1. 5% Jul 1. 9% Aug 1. 1% Sep 1. 8% Oct 1. 9% Nov 1. 2% Oct 1. 2% Nov 1. 9% Dec 1. 0% Source: (X-rates. com, 2018) According to the data above, the forecast is based on the interest rates on parity basis of the two countries, US and UK. The highest amount of the parity level in July 2018 is expected to be 1.

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191 (X-rates. com, 2018). The lowest value in the parity level in the same month is expected to be 1. According to the information, the forecasted average for the month will be 1. The value of the average is 1. 116 during the duration (X-rates. com, 2018). In the last month of the year, the highest is expected to be 1. 289 with lowest hitting 1. Since the commodity is new, one might expect that the value of return is based on the amount capital that will be invested by the firms. The rate of return is crucial since it shows the value of the project and its worth (Laux, 2012). A good business opportunity should have a positive return on the investment. When the value is positive, it shows that there is a generation of income to the shareholders.

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The net present value, also known as NPV is the common method which is used to evaluate a project. 00 Less: Initial Outlay 825,000 825,000. 00 The net present value (NPV) of the Investment 25,679. 00 In the above case, the initial outlay of the project is £825,000. 00 which is expected to run for five years in the UK market. The cash flows in the above project are positive except for the first year when there is an initial outlay of the project. Hedging will be attained through taking a position in the futures market to ensure that there is an opposite movement to the physical market (Ward, 2005). The objective will be to reduce the risks associated with the loss of income due to changes in the market conditions.

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