Question

write a two-page paper on how you would convince someone to invest $1,000,000 in your company and how would earn a return for the investor.

Answer 1

Convince an investor to invest $1000,000 in my Firm

The name of my firm is ABC ltd. it deals with manufacturing of mobile phone. The demand of the handset is getting increased in the market however, at present, it is found that the firm is unable to meet the requirement of demand in the market so the management of the firm decides to introduce a new technology into the system in order to increase the production level that fulfils the demand of the handsets.

The management decides to purchase a ‘magic machine’ costing $1500,000 which is capable to produce 12000 handsets per month. In this connection ABC ltd has entered into a contract with a marketing firm which may undertake the contract where it is laid down that the marketing firm undertake to lift 80000 handsets in the coming year and 20% increase for next year and 44% increase subsequent three years. These data are against the outside investment of $1000,000 and it does not consider the investment done through the use of retained earnings.

For making investment to purchase the required machine the firm is searching a viable investor who may invest at least $1000,000 and the rest amount will be collected by using the retained earnings of the firm.

The management of the firm has found a potential investor called ‘XYZ’ brothers that show an interest to invest the required sum to ABC ltd provided to get back the return more than the existing hurdle rate prevails in the existing market.

In this connection, the ABC ltd has prepared some viable planning in respect of several phases of the project that may enable the investor to comprehend that the firm is able to cater the growing demand of handsets in the near future.

Task 1- Strategic planning

It is a planning process which includes to plan the policies, directions, priorities, tactical areas of development of the firm in order to meet the goal of the firm.

Task 2 – Investment opportunity

It refers to identify the potential area of investment opportunities that may lead to attract the investors. Here in the current firm the potential investment opportunity is to implement a special types of machine in order to produce effective number of handsets for the future customers having lower budget to buy the sets.

Task 3 – Preliminary screening

This is the phase where the firm is required to identify the wastages in order to remove it in the production process that creates the burden of incurring extra cost together with using unnecessary human resources and spending unproductive time so to control such wastages sought to be undertaken by identifying the areas where such wastages take place.

Task 4- Financial appraisal of the invested project

It requires adopting suitable forecasting cash flow technique and risking policies in order to set the investment program in favour of the firm. In the current case the investor demands to have the return more than the hurdle rate. Therefore, by applying Internal rate of return method known as IRR the firm should satisfy the investor that the firm is able to meet the required return criteria of the invested firm.

In the given problem it is said that the firm will appoint a marketing firm to market its product and in the coming year it is set that 80000 sets will be marketed.

A project is laid down which exhibits the NPV of the firm by investing $1000,000 when the WACC is 8% prevails in the market. The interested firm who seeks to invest such money requires IRR.

IRR is the rate which that equalise the Invested amount with the summation of present value of the cash flows.

The projected cash flows with NPV is given

	$
Initial Investment from investor	-1000
Hand set sold		80000	96000	115200	115200	115200
$ in lakhs rounded off		$	$	$	$	$
Revenue		2400	2880	3456	3456	3456
Raw material cost		1840	2208	2650	2650	2650
Other expenses		200	250	300	300	300
Depreciation		200	200	200	200	200
Total cost		2240	2658	3150	3150	3150
Earnings before tax(EBT)		160	222	306	306	306
Earnings before tax@40%		64	89	122	122	122
Income after tax		96	133	184	184	184
Add: Depreciation		200	200	200	200	200
Cash flows		296	333	384	384	384
WACC is 8%		274	286	305	282	261
NPV	407

The IRR rate should be such that equalise the cost of investment with the present value of cash flows for the 5 years. Therefore, the IRR must be more than WACC rate which the invested firm seeks at this moment.

Task 5- Implementation and monitoring

Once the project is accepted by the investor it is required to set up the facilities relating to manufacturing of the product together with effective engineering design and a well organised training program of the technical staff.

Task 6 – Post implementation

It is called the audit phase of the project once it is implemented where a detailed and minute analysis are required to check the difference between the projected earnings of the firm with the actual earnings and the projected costs of the firm with the actual expenditure considering risks factor involved in the project.

The risk factors are external and internal of the firm. The external risk factors are the inflation rate risk, interest risk, term structure risk, GDP risk.

The internal risk involves the business risk and financial risk of the firm.