Question

You are a start up in the highly competitive smart phone market. Your introductory offering to the marketplace was well received and sales were more than very good. You have two options: reinvest the profits into new equipment or invest in R&D. Give the pros and cons for doing each option. Also, are there any creative financing options available for R&D that would allow you to do both?

Answer 1

Reinvest the profits into new equipment;

As per information of the question it is clear that firm received very good demand from the market hence our firm definitely generating good amount of profits.

So under this option our firm can reinvest this profits into new equipment so that increasing demands can be meet out and our firm can generate some more profits. Normally wee see that when demands in the market is higher then firm has to produce more products so that increasing demands can be meet out. Hence reinvestment is a good option. But there may be some problem also, as we know that market remains dynamic hence a firm need to do continous R&D so that changing pattern of the market can be meet out. Hence we can say that sometime reinvestment can have negative impact on the firm. Apart from this investors also may oppose reinvestment of the profits because they want regular returns as dividends.

Investment in R&D;

This is clear that it is a competitive smart phone market hence R&D will be required all the time. If our firm is not doing R&D or is not making good investment in R&D then firm may loose its’ market hence our firm need to make regular R&D and should make a proper investment in R&D so that regular R&D can be done without shortage of fianance.

Apart from this we know that this type of market requires new innovative techniques & products hence R&D becomes much necessay. So for meeting changing requirements of the market proper investment in R&D is good option.

So overall we can say that a firm should neither invest whole profits in new equipment nor invest whole profits in R&D. Although a firm should make proportionate investment in new equipment and in R&D so that all types of requirements can be meet out.

Creative financing options available for R&D;

With the help of alternative financing options a firm can meet out its’ both objectives. Hence followings are the main financing options available for R&D;

·        Bank loans

·        Grants & subsidiary

·        Business angel

·        Venture capital

·        Corporate venturing

·        Crowd funding

·        Tax incentives etc.