Capital Investments in Emerging Markets

General Electric Company is one of the most acknowledged companies across the world. The company's center of operations is situated in Boston. In particular, the manufacturing company has various business operations in different segments. These include oil and gas, power and water, aviation and transportation. This shows the company's versatility in manufacturing as it ranges from the engineering industry to automotive industry. The company's prevailing revenue generated lies in the range of $140.39 billion as of the 2015 fiscal year. In the 2012 financial year, the company was ranked as the fourth biggest firm in the world. General Electric Company manufactures aircraft engines, locomotives and other transportation apparatus, lighting, electric control gear, generators and turbines, and medical imaging paraphernalia. In addition, the company is the owner of GE Capital, which provides commercial finance, commercial aircraft leasing, real estate, and financial services for the energy sector (Hoovers, 2016). Since its establishment in 1892, General Electric has expanded its business operations to various nations across the world. With the incessant growth rate and development of emerging markets, the company has a great opportunity to further expand and propagate its business operations (General Electric, 2016).

Suggest a methodology to supplement the traditional methods for evaluating the capital investments of your selected company in the emerging markets to reduce risk. Provide a rationale for your suggested methodology

A recommended methodology to supplement the traditional methods for evaluating the capital investments of General Electric Company in the emerging markets to reduce risk is the discounted payback method. This approach can be very beneficial to the firm, particularly owing to the various business sides. The payback period is one of the simplest methods of evaluating capital investment. In this case, projects or investments with a shorter payback period are more often preferred for investment in comparison to investment with longer payback periods. However, with respect to the discount payback period, the time value of money, also referred to as the discounted value of cash flow is taken into account for calculating the payback period (Capital Investment, 2016). Therefore, this is the period necessitated to recover the initial cash investment for a project, which is equivalent to the discounted value of the anticipated cash inflows. This particular methodology takes into consideration the time value of money and the discounting of future cash flows. Bearing in mind that the company has various projects in different business aspects, it is rational and beneficial to employ the discounted payback period (Capital Investment, 2016). Another strong suit of this particular approach is enhancing the capacity of General Electric's management to undertake investment decisions in a contemporary market setting where firms endeavor to attain a competitive edge. However, regardless of these aspects, it is imperative for the management to be wary of the impact that inflation can have on the prospective capital investments set by the firm.

Assess one (1) way in which inflation could potentially impact planned capital investments in emerging markets and examine one (1) approach to perform an accurate evaluation of the investments. Suggest how this knowledge may impact management's decisions

Inflation is delineated as the general increase in the price of goods and services over a certain time period. One of the impacts of inflation is the depreciation of a currency, which implies that such currency has a devaluation in its purchasing power. Considering this, inflation influences the currency exchange rates, general prices and also prospective planned international capital investments. In this case, the exchange rates alludes to the purchasing power of currencies in emerging markets with respect to goods and services from the United States, and also the decline in the dollar with respect to goods and services from emerging markets (Mankiw, 2014).

Inflation can have an impact on planned capital investments for the company and the decisions made by the managers. Owing to inflation, there is an increase in the cost of raw materials as well as a rise in labour wages. In turn, this gives rise to an increase in production costs. The increase in the costs generates obstacles for economic development. Therefore, General Electric Company will find it quite challenging for planned capital investments owing to the ambiguity and doubt regarding price levels. In addition, hedge funds and financial leaders of the company might be hesitant in getting into longstanding contracts that could have possibly given rise to the development of General Electric (Investopedia, n.d). Inflation generates vagueness in the long-standing position of investment projects, which as a result could dissuade General Electric from undertaking investments in other expanses. Inflation could also potentially impact General Electric through its liquid assets. The rise in inflation has a tendency of holding fewer liquid assets and lower returns. This might be detrimental on the prevailing business affiliations (Ross, 2015).

Contrast the modifications you would make in evaluating the projects to increase internal capacity in North America with the modifications you would make in evaluating expansion projects in the global market. Suggest one (1) way that this information will impact the decisions made related to expansion

In the contemporary, General Electric Company has invested in projects in North America as well as other nations internationally. In recent periods, the emerging markets have seen a boost in business, owing to their growth and development. In turn, the level of production in such emerging nations has substantially increased compared to the production levels in North America. One of the characteristics of emerging nations is not only the cheap cost of raw materials but also cheap labor. Therefore, the suppliers in North America are in constant competition with those emanating from the emerging nations. One of the modifications that would be made in increasing internal capacity in North America is to convey such costs to the end-users or fail to bear such costs through alterations in regulatory standards. Another aspect to be taken into account is that in North America, the company will be propagating its operations, whereas in emerging markets this will basically be a start-up for the business. On the other hand, the company endeavors to expand its operations in emerging markets, for instance India, China, Brazil and Russia. In these expanses, the firm can make the most of their incessantly fast rates of economic growth and development and therefore prospective greater returns. The other decision is whether to place capital investments in the already developed and prime markets like North America, taking advantage of the progressive inventive capacities and huge market caps.

Another modification to make in evaluating expansion projects in the global market encompasses the risks entailed. For instance, investing in nations such as Brazil and China, the company is bound to face risks like political risk, rises in inflation, foreign exchange exposure, and also economic instability. This information is bound to influence decisions made in relation to expansion as it could amount to the interference in the marketplace and adversely impact cash flows from the firm's business operations. In the end, this might give rise to lack of capital coverage. Therefore, the management of General Electric Company has to take all these factors into consideration.

Examine two (2) benefits of using sensitivity analysis in evaluating the projects for your selected company. Suggest how this approach can provide a competitive advantage for the company

Sensitivity analysis is a methodology employed for predicting the result of a decision taking into account a particular range of variables. The technique is utilized to ascertain the manner in which various values of an independent variable can have an influence on a certain dependent variable under a certain number of assumptions (Weygandt et al., 2012). General Electric Company operates in various business segments such as transportation, aviation, oil and gas, power and water. The company endeavors to invest in various projects across the globe within these business segments. The benefit for General Electric Company in using sensitivity analysis in evaluating these projects is that it will ready such project managers in the event that the project investments fail to attain the anticipated returns. This will enable them to make additional analyses prior to investments (Koening, 2016).

Through this approach, the company will be able to ascertain the key variables that impact the project cash flow projection. It also aids in making decisions on where the managers ought to spend additional resources in gathering data and enhancing data forecasts. Another benefit of this particular approach is that it will facilitate project managers to expect and get ready for questions and inquiries of what if. This is centered on various scenarios and their prospective results ensuing from altering conditions that are tested in formulating and justifying a project. What is more, this technique does not necessitate employing probabilities and can be utilized on any amount of project value. Another benefit of sensitivity analysis for the company is that it will be advantageous in projects that necessitate investment quickly and also have minimal information and resources (Lumby and Jones, 2001).

References

Capital Investment. (2016). Capital Investment Appraisal: Appraisal Techniques. Retrieved from: capital-investment.co.uk

General Electric. (2016). GE Businesses. Retrieved from: http://www.ge.com/

Hoovers. (2016). General Electric Company: Company Profile. Retrieved from: http://www.hoovers.com/company-information/cs/company-profile.general_electric_company.8e594783fd3e6c6e.html

Investopedia. (n.d). Inflation: Inflation and Investments. retrieved from: http://www.investopedia.com/university/inflation/inflation4.asp

Koening, E. (2016). Sensitivity Analysis for Capital Budgeting. Chron: Small Business. Retrieved from: http://smallbusiness.chron.com/sensitivity-analysis-capital-budgeting-10153.html

Lumby, S., & Jones, C. (2001). Fundamentals of investment appraisal. Cengage Learning Business Press.

Mankiw, N. (2014). Principles of Macroeconomics. New York: Pearson.

Ross, S. (2015). What is the impact of inflation on liquid assets-Investopedia. Retrieved from: http://www.investopedia.com/ask/answers/032715/what-impact-inflation-liquid-assets.asp

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2012). Managerial accounting: tools for business decision-making. Hoboken John Wiley & Sons.