Capital Budgeting and Foreign Direct Investment Decision
1. How big is the risk for KFC to enter the African market? What can go wrong?
All business transactions encompass some magnitude of risk. Moreover, when such transactions traverse global borders, they come with extra risks that are more often than not lacking in domestic business transactions. According to Peters (2010), this level of risk is not as extensive and severe as perceived. Africa is the quickest growing expanse in the globe subsequent to the Asian region. However, with the exclusion of interests in mining and petroleum, there is negligible attention paid to the expanse by Western corporations, substantially due to incessant negative perspectives of high political volatility. The mounting interest displayed to Africa as a possibly eye-catching destination for foreign direct investments is fundamentally as a result of the increasing commitment of emerging Asia with nations in the expanse. Western companies in general have substantially restricted knowledge and understanding regarding the prevailing investment environment and the key institutional restructurings that have occurred all throughout continent in the past number of years. This hinders them from distinguishing new business prospects and to ascertain approaches to alleviate risks (Peters, 2010). KFC entering the African market is a big risk owing to the reason that the African market is a risky market. What could go wrong is that KFC could end up experiencing losses. In accordance to Gill (2010), these losses may come about when KFC has made initial capital investments but fail to recover such funds in the cash flows generated from the business. This can be caused by numerous aspects within the African market. One of the aspects that could go wrong is the lack of proper operation due to bureaucracy. More often than not, businesses within Africa fail to thrive or experience issues because of government controls and bureaucratic tackiness.
2. What would be your major concerns if you were the Chief Financial Officer of KFC and you were asked to find financing in the African market?
Being the Chief Financial Officer of KFC, there would be key concerns in finding financing in the African...
One of the major concerns would be the high magnitude of corruption in Africa. Corruption takes into account the misuse of power and authority, whether in terms of supremacy or money, so as to accomplish particular objectives in unlawful, deceitful, or bigoted ways. It is difficult to obtain investors to provide financing in Africa to be eager in investing in newfangled ideas as well as emerging businesses such as KFC. This is owing to the fact that there is a high level of insincerity within the African market. This is made worse by the fact that there is a considerably hostile business setting where in majority of the African nations, the government which is the largest buyer, is comprehensively leaned in corruption (White, 2011). Corruption within the African market comes in several forms, taking into account racketeering, bribery, and preferential treatment. As a result, this can lead to other businesses obtaining the funding that was expected to be granted to KFC owing to such relations.
Another key concern regarding financing in the African market is political instability. Numerous African nations experience problems owing to internal instability, geopolitical associations, expected or unexpected government actions, or government disjointedness that are all instigated by social, economic, or political essentials that are present in a nation’s internal or pertinent external environment. This can also be caused by the change in political institutions in African nations emanating from a change in government control. These sort of political instabilities not only have a potential of generating losses, but in actual fact do lead to losses in African markets. Business are unable to open during times of political instability that may encompass war. As a result, investors and financiers become hesitant in providing finance owing to such high political risk factors. This is because in the end business can be interrupted giving rise to losses. As a result, it becomes significantly challenging for managers and organizations as a whole to obtain financing in the African market (Gill et al., 2010).
3. What is the project's net present value?
Year 0
Year 1…
