An Investment is the outlay of a sum of money in the expectation of a future return. The process of investment appraisal is designed to ensure that the right amount of money is invested in the right projects at the right time. Investment Appraisal is therefore more than the identification and evaluation of suitable projects. There are many ways to appraise investments based on the result of the calculation. These techniques are namely Accounting Rate of Return (ARR), Payback period calculation, Net Present Value (NPV) and Internal Rate of Return (IRR).
One of the main reasons that led to the capital investment by Hazelwood Sandwiches was that the old factory's limitations were holding back the growth and losing opportunities for the company. As Hazelwood Sandwiches is the largest company in Greencore's Chilled Foods Division and it leads the market, it has a huge demand of sandwiches which are supplied to retailers. To meet the requirements rising through the growth in demand of Hazelwood Sandwiches, it had to make investment in plant which could increase the production capacity of the company per week. (FMA, 1972)
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Another main reason was the demand of retailers to purchase from a supplier that maintains the most up to date technology for its production, labor and automated processes. This also includes the facilities at the work place like having gymnasium, state-of-the-art restaurant, cash machine, company shop and an on-site hairdresser. If Hazelwood Sandwiches wouldn't have invested in order to fulfill this demand of its retailers, it might have stayed back in the race of competition and consequently, the losing its customers. (Hugos, 2009)
The biggest of the three reasons which led to the capital investment by Hazelwood Sandwiches was the need for the improvement in efficiency of operations, production of more sandwiches in less time period, overall increase in production and maintaining the quality of the sandwiches i.e. keeping them fresh. The freshness can only be maintained by not storing the inventory long before the use of it for the production. A Just In Time (JIT) approach is used for this purpose. It allows the company to call for its raw material just when it is required for production. It reduces the inventory holding cost of the company while increasing the ordering costs as every time the material in needed, the order is to be made. Moreover, the investment increased the production capacity of Hazelwood sandwiches to 3 million sandwiches a week. (Lumby and Lumby, 1988)
Payback Period Method:
Time period required to recover the cost of an investment is called payback period. Payback period method tells how much time it will take to recover an amount from a project which was invested in that project. It is calculated using following formula:
Payback period = Cost of project / Annual cash flow
Project with shorter payback is selected for better investment decision.
Though payback period is quite easy to calculate and to understand, there are few problems too with this method of investment appraisal. It does not take into account cash flows after the payback period, hence it ignores profitability and does not measure it. This method also ignores time value of money. One project could be more valuable than other project on the basis of cash flows but payback period method does not takes into account time value of money. (Rohrich, 2007)
Accounting Rate of Return (ARR):
It is profit or return expected on invested money. Accounting rate of return is calculated by dividing average accounting profit with average investment. It is compared against profit potential for projects, products and investments by investors / business owners.
It is easy to calculate and understand. Accounting rate of return calculation is based on accounting profit which is a measure of profitability. Accounting rate of return ignore time value of money. It ignores the cash flow from investments which are integral part of maintaining a business. Accounting profit is subject to manipulation quite easily while cash flows cannot be manipulated.
ARR technique is often used internally when there is selection between projects. It can also be used to measure performance of projects within organization.
Net Present Value (NPV):
Always on Time
Marked to Standard
Cash inflows and cash outflows over the life of the project are estimated and discounted using appropriate discount rate. It calculates the present value of cash inflows and outflows. The net of present value of these cash inflows and outflows is known as net present value. NPV calculation is sensitive to the reliability of future cash flows. Projects with positive NPV are accepted while projects with negative NPV are rejected.
NPV technique takes into account time value of money and it also accounts for inflation. NPV technique ignores size of the project. The use of this technique is difficult and it involves complex calculations. It is also difficult to calculate appropriate discount rate. Net present value technique does not give accurate decision when projects are mutually exclusive and when all the projects have different lifetime. (Gotze, Northcott and Schuster, 2008)
Organizations should invest in people to make them have a belief in the worth of their job i.e. their mental satisfaction regarding their job, to reduce absenteeism as it costs expenses to the company in the form of reduced production and hence causing loss to the company. Investment in people is also essential to make the employees feel being valued by their employer. This allows them to work harder for the betterment of their company and to stay loyal with their employer. Organizations like Hazelwood Sandwiches may invest in its employees by providing them the state-of-the-art facilities like an on-site hairdresser, gymnasium, cash machine, a dry cleaning service and a state-of-the-art restaurant to facilitate them at the work place. This makes the employees stay relaxed at their workplace. (Cascio and Boudreau, 2008)
Another way to invest in employees is arranging induction programs to make new employees feel being a part of the team and adjust in the environment of the organization. The employees may also be provided with bonuses and commissions on meeting specific targets regarding their jobs. This makes them work more keenly and efficiently in order to generate profits for the company and achieve the desired market share. Allowing flexible timings for ladies having kids is also an effective way to invest in employees. Many women find it impossible to manage their working hours along with their home and babies. If they are allowed to choose the working hours of their own choice, the job and its requirements may sound attractive to them and they work more efficiently with the aim to maximize the profits for their organization. (NRA, 1973)
Google Inc. is considered to be one of the huge organizations that facilitate their employees with an extremely friendly environment. One of the examples related to this experienced by the engineers that work at Google is that they are allowed to work 20% of their time on the projects that they have interest in. keeping them challenged and satisfied with their job, it also generates business for Google and increases its profitability. Some estimates show that this "20% time program" contributes 50% directly towards the launch of all new products. This adds value to the company as a whole and the employees stay motivated as well. Investment in employees in ways which make them realize their value to the organization also reduce the percentage of employee turnover in a period and long term relations are developed between the organizations and their employees. (Battelle, 2005)
Human capital is most important factor to stay competitive in the market and workforce planning is the most critical challenge in public sector. Those organizations which do not emphasis on attracting and retaining talents, eventually fail as their competitor might be following strategic employment of their human resources. The success of an organization depends upon its ability to manage talent that can bring innovative ideas to the organization and might play a vital role in future. An organization needs to ensure that it has human capital which can help the organization in its mission accomplishment. (Armstrong and Armstrong, 2000)
Customer satisfaction is one of the most important factors a company seeks for while expecting to earn a desirable market share in the industry. If the company is properly satisfying its customers, its success in the industry is somehow guaranteed and the employees also feel proud while working for such an organization. Although employees contribute a lot toward the satisfaction of a company, their own perception regarding the need for the organization to satisfy its customers, matters more than any other factor needed to be achieved for a company to make profit and satisfy its shareholders. Moreover, the organization's success depends on the quality of work its employees do. As the end product or the services that customers receive is provided by the employees of the organization, so their will to satisfy the customers counts lot more than the strategic apex and the middle line management of the company. The members of strategic apex are the ones forming the strategies for the company and the middle line management acts as a bridge between operating core and the strategic apex. The employees of any company fall into the operating core. So accordingly, middle line management implements the strategies formed by the strategic apex and the operating core has to work on it. The relation between customer satisfaction and the work done by operating core is direct. Higher the quality of work provided by the employees (existing in operating core), higher will be the customer satisfaction of any company and vice versa. So the significance of employees' perception towards customer services and service delivery satisfaction affects the company in all possible ways. (Hansen and Mowen, 2000)
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As the employees contribute the most toward a company's success, they are deemed to be the most valuable asset a company possesses.