Asal Nazi 007545224 CEM 434 Final

Chapter 1-Company Criteria 1. Determine Expansion Criteria. Choosing criteria for expansion has two dimension a more immediate needs of the company which is called short term and the long-range needs of the company which is called long term. These two may be fundamentally different but they have to be satisfied before making the decision of expanding. At times there are needs for expansion based on present facilities being utilized to or beyond their logical limit, also it may be that the future is expected to bring an a reduction in demand for the companys product, and in fact what is needed is retooling of facilities to prepare for a reallocation to the manufacture of some alternative product or product line. In many situations current plant capacity is accurate for present levels of demand although future trends indicate that more plant space and equipment will be needed. Under short-term criteria we have to look at immediate needs for expansion, which indicates how important expansion is to the immediate capacity of the company to supply goods and services to customer, there is no time to engage in extensive economic analysis before preceding things have to happen now. Also in an expansion situation the firm is in operation and needs to minimize the disruptive effects of any move or expansion into new facilities. Efficient use of capital, any expansion of facility will necessitate the use of capital. Looking at the Long-term criteria, company goals it is important to consider that the new and expanded facilities be sufficient to satisfy future needs, not just immediate ones which means productive capacity sufficient to satisfy expected long-term demand for the product or service the firm offers; changes in production techniques allows to make decision as to whether or not an extensive change in methodology is

necessary to achieve the companys goal; specialization concerns, the specific criteria that a firm will need to take into account are determined by the individuals conditions under which the company operates. Also determining the firms criteria involves whether to locate expansion facilities at the present site of operations or offsite, at some new location 2. Briefly write the advantages and disadvantages of off site expansion The advantages to off-site expansion stems from flexibility. Through creating the new facility at a completely new location. The site of the new facility can be chosen to maximize the efficiency of transportation, real estate, utilities, tax, community, personnel, and raw materials considerations as well as a host of other factors. The disadvantage of locating in an off-site location is an expected higher cost. Whether the expansion represents a secondary facility or a completely new one into which the company intends to move, the expense of locating the site, purchasing land, and starting from the ground up can be expected to considerably higher than what is involved with on-site expansion plan. 3. What is present value analysis? Money has a time value, which means at different points in time a given amount of money is valued differently. Present value Analysis Present value analysis is the application of an appropriate discount rate to a stream of future cash flows. It allows differing payment streams to be compared. The worth of a future amount of money at specific point in time. If one expects an investment to result in a cash flow at a certain time in the future, calculating the cash flows present value will help the investor decide whether the investment results in a real profit. Calculating the present value assumes that the investor knows both the future amount and the applicable interest rate or rate of return. In plant analysis, we must understand that whether financing the construction and start-up of our new facility through expenditures of company funds or through loans from banks we are spending money right

now that will not return money until some time in the future. To figure out if the expenditure is justified by the return we must compare dollars of the same value, which means todays dollars with tomorrows dollars. In order to do this we convert the future income to present value, which is todays dollar before comparison. Chapter 2-Company Purchase Options 1. Describe break-even-analysis? Break Even Analysis refers to the calculation to determine how much product a company must sell in order to break even on that product. It is an effective analysis to measure the impact of different marketing decisions. It can focus on the product, or incremental changes to the product to determine the potential outcomes of marketing tactics. Break Even point is Total fixed costs plus the total variable costs. Break-even analysis involves analyzing income and outgo to determine at what level of production enough revenues are generated from the sale of the product to cover the costs of production. 2. In the airline 3. Lease Vs. Purchase? Financial options all depend on the conditions under which the firm itself is operating. The lease purchase is an arrangement where lessees are allowed to purchase the property if they so desire, with all or part of the lease fees paid applied to the purchase of the property. The lease purchase option is advantageous to the firm looking to expand or create a new facility because it delays the purchase decision without losing the capital already invested in the lease payment, but if funds are readily available the best course of action is purchase. Nevertheless there are cost involved in the purchase option either in the form of interest or of opportunity costs to the firm, which are cost incurred by choosing to purchase some particular property rather than use the money for some other business asset or venture. In general purchase is preferable to lease as long as the choice of property is a certain one and funds are available.

Chapter 3 Venture Analysis 1. The purpose of zoning laws is to guarantee the orderly development of a municipal area. For an example construction cannot start on facility that is to be located in or near a municipality until the approval of the zoning commission has been obtained. For any given location it is necessary to know the climate of the committee & the ease with which permits and zoning approvals would be given. Zoning board determines exactly what type of activities will be allowed in given subsections of the municipality. Within a given zone, only the assigned range of activities will be allowed. Any variation from that must be sought through petition to the zoning board. 2. Facility Expansion advantages lies in the fact that the location of the facility remains the same and that in many cases production can continue while the expansion is underway. In expansion if the type of operation doesnt change and if the expansion is simply an add-on to existing operations, this may be the most advantageous type of approach. The disadvantage of expansion is when the disruption of the normal workflow, and from the fact that the facility now has two ages, an older, perhaps less efficient component and a newer, more up-to-date component. Through the remodeling process, the facility is modernized to increase efficiency and in many situations productive capacity. In remodeling the changes are internal and the work force can often be maintained with a minimum of retraining and restaffing, that the cost of the change is confined to machinery and equipment with minimal construction costs being incurred, and that the upgrading of production methods can often reduce variable costs significantly. The shortcomings involved with remodeling or modernization are due to the extreme disruption to operations that remodeling can produce. The law of diminishing returns sometimes simply overcomes a given structure. With a remodeling approach the firm may find it locked into the confines of the existing facility, unable to take full advantage of other alternatives that might be available to them at a new location.

3. Product life cycle is the expected sales life of a given product in the market place. As there are general business cycles, demand creates life cycles for any given product, some being short and others quite long. If a facility was going to be created to supply good and services the cost and life of the facility need to match those of the product or service it is designed to supply. Even a cost-efficient facility is useless if the life cycle of the product is too short to allow for its full utilization. Also in order to create the facility in such a way as to make it salable at a profit at the end of the life cycle of the product. The best use of capital it can be shown that the overall return on investment is sufficiently high and that there is a true need for the facility, the project may still be a viable one, even in the face of a short life cycle. Due to the rate of change being high in todays business world and promises to become even higher in the future, flexibility is generally more important than performance.

Chapter 4-General Site Analysis 1. Communities hungry for the influx of industry will often make sizable contributions to the process by willingly upgrading highways, sanitary facilities, and the like to encourage industrial location. The availability and cost of investment funds may be more favorable locally than elsewhere, which has the added advantage of solidifying the feeling of partnership between the incoming firm and the surrounding community. 2. The overall economic and social well-being experienced by the population of some geographic area, in terms of economic wellbeing, health, prosperity, and available opportunities and services. Given site has a relatively low quality life to offer does not mean that It is a poor choice. This raises an issue about how the location of facility will affect the quality of life; the number of jobs offered in the community rises as a result of a facilitys locating there and can add to the quality of life in the area. There is also an increase in

educational possibilities, overall economic improvements in the region, and the possible attraction of other business into the region can have very positive effects on the community as a whole. 3. Facilities are closed because of the lack of demand for the product, of a shift in either markets or emphasis, or because the firm can no longer rationalize the cost of keeping the facility open. In closing the facility is either liquated without replacement or operations are shifted to some other location. Facilities are closed before they become a drain on company resource. A firm must remember to consider the effects that closing an individual unit will cause not only on production and local conditions but also on other installations. Hidden factors such as the ability to take up shortterm slack or lag time in ordering often play a role in this type of decision. Given the choice, a facility that is relatively less efficient than others may remain open while others are close d because its important to the overall operation. In some cases closing the site without replacement, the choice becomes a matter of whether or not the firm will experience improvements in operation and profits over both the short and long term.

Chapter 5-Types of Financing 1. A Rental Agreement provides for a tenancy of a short period often 30 days that is automatically renewed an end of the period unless the tenant or landlord ends it by giving written notice. For these month-to-month rentals the landlord can change the terms of the agreement with proper written notice. A written lease on the other hand gives a renter the right to occupy a rental unit for a set term, most often six months or a year but sometimes longer, as long as the tenant pays the rent and complies with other lease provisions. The landlord cannot raise the rent or change other terms of the tenancy during the lease, unless the tenant agrees. Unlike a rental agreement, when a lease expires it does not usually automatically renew itself. A tenant who stays on with the landlords consent after a lease ends becomes a month-to-month

tenant, subject to the rental terms that were in the lease. 2. Leasing is a little more than a long-term rental agreement, leasing involves long-term rental of plant and or equipment according to the terms mutually agreed upon by both parties. A lease purchase option differs from the straight lease. With a normal lease arrangement the building and equipment revert back to the other purpose. The end of lease fees and purchase options are centered in the depreciation of the equipment of facility in question and their salvage value. The lease-purchase allows the lessee the option to purchase the property, with all or part of the lease fees paid applied to the purchase of the property, and it emphasis on flexibility. The advantage of lease-purchase agreement lies in its ability to allow the lessee to decide at a future date whether to take permanent ownership of the property or not. Depending on the terms of the agreement that decision can be made at anytime at specified times or at the end of the lease-purchase agreement. 3. Opportunity cost stem from the fact that had the company not chosen to use funds for the purchase of plant and equipment, it could have used those funds for some other purpose. Since the main goal of the firm is to maximize profit the funds would have been used to generate those profits. By using the funds available for the purchase of plant and equipment, the firm has foregone the opportunity to make a profit doing something else. This is a very real cost. At minimum the firm has option of lending the funds to someone else, which this would have produced interest income at the going rate. The interest rate is not realized if the firm uses the funds, and though the firm incurs the cost of that foregone opportunity.