Decisions involving Capital Budgeting and Foreign Direct Investment

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 market. 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
Year 2
Year 3
Year 4
Year 5

 
 
 
 
 
 
(10,000,000)

Initial Cost (R)
(12,000,000)
 
 
 
 
 

Cash Flow (R)
 
3,350,000
 3,899,000
 1,122,000
 4,200,000
 

Withholding Tax (10%)
 
0.10
 0.10
 0.10
0.10
 

Withholding Tax (R)
 
335,000
 389,900
 112,200
 420,000
 

Cash Flow after tax (R)
 
3,015,000
 3,509,100
 1,009,800
 3,780,000
 

Exchange Rate
0.125
0.125
 0.125
 0.125
 0.125
 

Cash Flow to KFC
(1,500,000)
376,875
 438,637.50
 126,225
 472,500
 1,250,000



The net present value of a project is calculated by summating the cash flows and subtracting the initial investment incurred.
PV of CF = CF1 / (1+r)1 + CF2 / (1+r)2 + CF3 / (1+r)3 + CF4 / (1+r)4 + CF5 / (1+r)5
= 376,875/ (1+0.17)1 + 438,637.50 / (1+0.17)2 + 126,225 / (1+0.17)3 + 472,500 / (1+0.17)4 
= 376,875/ 1.17 + 438,637.50 / 1.3689 + 126,225 / 1.601613 + 472,500 / 1.87388721
= 322,115.38 + 320,430.64 + 78,811.17 + 252,149.65
= 973,506.84
NPV = Total PV of CF – Initial Cost
= 973,506.84 – 1,500,000
= -526,493.16
Including the salvage value the return in the fifth year is 1,250,000 - 526,493.16 = 723,506.84
4. Based on your analysis and findings, what would you recommend to KFC? Should KFC move into the African market? Are there any advantages of moving into African market for KFC?
On the basis of the analysis and findings, there are different recommendations made to KFC. To begin with, the NPV of the project on the fifth year is positive. Therefore, it should be accepted. However, based on the calculations and analysis, it is not recommended for KFC to move into the African market. This is owing to the fact that the return generated in the fifth year is lower than the initial investment put into the project. Another recommendation for KFC is to take into consideration the various risks that would be involved in entering the African market. One of the risks encompasses the currency risk. This is in the sense that the value of the African currencies in comparison to the United States dollar can be excessively volatile. Therefore, this implies that the gains to be generated by the investment made by KFC can be prospectively diminished if the currency experiences devaluation or substantially drops. Secondly, there is the risk of the political market in Africa. Numerous nations in Africa have from time to time experienced governments that have been not only unstable but also volatile. As a result, political instability and unrest that comes about can give rise to severe impacts to the economy at large and also KFC and its stakeholders. Another recommendation is that KFC ought to consider the economic risk that comes about from investing in Africa. This is owing to the aspect that markets in Africa may more often than not experience high levels of inflation or deflation, business setting that are unregulated and also poor monetary policies. As a result, this can bring about challenges to KFC not only entering the market but also continuing its operations (Duhaime et al., 2012).
There are advantages of moving into African market for KFC. One of the key advantages is the potential for growth. The African market for KFC is perceived as an emerging market for investment, which is a massive prospect for growth. To begin with, Africa has a high population that is constantly growing. This implies that there is an increased level of demand for products and services. Through expanding its operations into Africa, this gives KFC the chance to take advantage of this increasing demand level. Basically, the company could profit by maximizing the chance to reach consumers that are previously yet to purchase its products. An additional advantage of investing capital and entering into the African market is that the middle-class population is increasing. This implies that more and more individuals are able to afford the food products that are offered by KFC. Moreover, these are the group of people that are constantly busy with work and therefore would increase their likelihood of purchasing fast food. The tastes and preferences of the African market has also changed in the past number of decades. Progressively more people in Africa are embracing and having an inclination towards fast food meals and this present an amazing opportunity for KFC to bring about its business operations and increase its consumer base. Another advantage is diversification. It is imperative to note that of KFC solely operates in America, then there is a greater likelihood of suffering when its economy experiences a downward turn. By expensing its business operations into Africa, then KFC may be able to insulate itself from these financial ups and downs. This is in the sense that if the profits are low in America or its other markets, then its operations in America may redress the balance. Moreover, KFC may profit from the fluctuations of the value of conducting business in various financial currencies (Pendleton, 2017).
References
Duhaime, I. M., Stimpert, L., & Chesley, J. (2012). Strategic thinking: Today’s business imperative. Routledge.
Gill, A., Biger, N., & Tibrewala, R. (2010). Understanding and mitigating direct investment risk in the Indian real estate market. Business and Economics Journal, 2010, 1-10. Retrieved from http://astonjournals.com/manuscripts/Vol2010/BEJ-2_Vol2010.pdf
Pendleton, E. (2017). The Advantages of Doing Business in an Emerging Market. Chron. Retrieved from: http://smallbusiness.chron.com/advantages-doing-business-emerging-market-22717.html
Peters, S. (2011). Emerging Africa: The new frontier for global trade. Economics, Management and Financial Markets, 6(1), 44-56.
White, B. (2011). Access to Finance is the Biggest Challenge to Entrepreneurs in Africa. Venture Capital for Africa.