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Long Term Investment Decisions

It is worth mentioning that long-term investment decisions should be based on analyzing external and internal factors that affect the company’s activity. In addition, government policy and its regulations may significantly influence the firm’s operations and investment policy. The long-term investment decisions are quite related to demand elasticity, the government’s actions, and the interests of the company’s stockholders and managers.

Outline

The companies may change their pricing strategies in response to changing demand elasticity. The elasticity of demand means the relative degree of variability of demand under the influence of relative changes in market prices. The price elasticity of demand is “a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price” (“Price Elasticity of Demand,” n.d.). In other words, if the value of demand remains unchanged despite significant changes in the market price, it is called inelastic. For example, the demand for food products (bread, milk, meat, salt, sugar, and other products) is considered inelastic, because such products are essential and daily use commodities. Consumers will buy these goods no matter how high is the market price for them. In addition, the demand for luxury items, such as products from precious metals, is flexible.

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If the demand for the company’s products becomes less elastic, it would be reasonable to increase their price, since the value of demand will be lowered for a smaller amount than its price.

Thus, the companies should respond to the increasing level of prices by setting appropriate pricing policies. The plan of managers’ actions may consist of the following steps:

  • determination of goal of the company’s pricing strategy;
  • analysis of the elasticity of demand for the firm’s products;
  • examination of current market conditions, and the company’s internal and external factors that affect its performance;
  • analysis of the impact of lowered elasticity on the firm’s opportunities to increase the price;
  • examination of the competitors’ pricing policies;
  • consideration of an entire range of possible strategic alternatives;
  • choosing the best pricing policy.

As is known, the company’s revenue may be calculated by multiplying the number of goods sold and the product’s price. Thus, in the case of changing demand elasticity, the firm’s management should compare the percentage of change in demand and a product’s price. If demand is inelastic, the company’s revenue will be increased in the case of raising the product’s price.

Effects of Government Policies on Production and Employment

It is worth mentioning that the government may influence the production and employment within the country by using the tools of monetary and fiscal policies. It should be noted that each central bank conducts monetary policy in order to achieve certain economic goals. These objectives may include stimulating economic growth, restraining inflation, decreasing the unemployment rate, and other aims. Therefore, central banks may conduct stimulating or restrictive monetary policy. Stimulating policy, on the one hand, means decreasing interest rate, reduction of reserve ratio and selling securities to stimulate economic growth. On the other hand, the restrictive monetary policy includes increasing interest rate and reserve ratio and buying securities to decrease the money supply and restrain the paces of inflation. The government may stimulate economic growth within the country by increasing government spending, decreasing tax rates, lowering interest rates, and taking other proper measures. In such a case, the money supply, as well as aggregate demand, will be increased. As a result, the rates of GDP growth, production, and level of employment will be enhanced.

In addition, the government may decide to restrict the rates of inflation by decreasing government expenditures, increasing tax rates, and reducing the money supply. In such a case, the aggregate demand will be reduced lowering the general level of prices. However, the production and level of employment will be reduced, too.

Taking into account that the biggest producers of low-calorie, microwavable food are based in North America, it can be predicted that due to stimulating economic policy conducted by the U.S. government the company’s employment and production will enhance.

To conclude, the effects of government policy on production and rate of employment depend on the kind of economic policy. The stimulating economic policy encourages increasing the rate of employment and scales of production while restrictive economic policy reduces the levels of employment and production.

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Government Regulations in Low-Calorie, Microwavable Food Industry

In order to determine the level of necessity of government regulation in the low-calorie, microwavable food industry, the main features of this industry should be considered. First of all, this field can be considered as an example of an industry with perfect competition. There are many manufacturers, suppliers and sellers in a perfectly competitive market (“Definition of Market Structure,” n.d.). Moreover, each of them cannot significantly influence the market price through changes in the quantity of output. Each manufacturer or vendor supplies a small number of products as compared to the total amount. Therefore, changes in the output of individual producers do not affect the market price. In other words, individual producers cannot move the market supply curve and, consequently, change the equilibrium price.

None of the producers can influence the market price. Varying the number of products, each of them believes that there is a single price, which is set in the market due to the changes in market demand and supply.

The perfect competition requires that consumers, producers, and resource owners are fully aware of the relevant environmental and technological conditions. Customers have all the pricing information. Manufacturers also must have access to any technology or pricing information. Resource owners should know all about the possibilities of their resources. Therefore, everyone has an equal opportunity to participate in the purchase, sale, production and marketing processes.

The perfect competition requires that all resources are fully mobile. In other words, each resource unit is free to enter the market or leave it quickly switching from one type of use to another.

That is why such market structure as perfect competition is very efficient since both the producer and consumer are not able to affect the market price.

Thus, the market power reduces the price in the low-calorie, microwavable food industry. Thus, government regulation is required to guarantee a minimum level of income and it is the first reason why government regulations are necessary. Moreover, in the process of competition, some producers may use inappropriate and unfair tools and, as a result, they may start to monopolize the market. Thus, avoiding any monopolies is the second important reason for government regulations in the low-calorie, microwavable food industry.

In addition, two examples of government involvement in a similar market economy should be provided. First of all, setting the minimum price level that exceeds the market equilibrium price can be considered as an instance of government regulations. In addition, quotes for food exporters are another example of government regulations in a similar market.

Complexities that would Arise under Expansion via Capital Projects

It should be stated that there are many complexities that may arise under expansion via capital projects. As it is known, large capital projects require many financial resources. Consequently, the first complexity is the determination of the amount of the needed money and possible ways of its attracting. All firms need a lot of financial resources for their existence and development. Financing is receiving of funds required for business operations. In the theory of financial management, there are two main types of financing: internal and external.

Internal financing is a process when funds are generated within the firm. These are the company’s own funds. In this case, the money can come from the following sources: income, sale of liquid assets, reducing working capital, credits from suppliers, receivables, and amortization.

Income is the main source of financing for small businesses. However, net income is not often enough for financing. That is why small firms should use another form of financing.

External sources of financing for small businesses include commercial banks, non-bank financial institutions (insurance companies, trust companies, investment funds, investment companies, pension funds), private firms, government and regional programs, sale of shares, funds from family and friends and other sources.

Each type of existing options for financing is related to some implications. Internal financing, on the one hand, is characterized by its limitations and higher cost of equity. On the other hand, external financing may provide an opportunity to obtain the needed financial resources, but it makes the company less financially stable due to increasing the percentage of liabilities in the structure of total assets.

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However, the entire range of complexities is not limited to attracting financial resources. It is needed to evaluate the efficiency of the capital project. It may be done through using such methods as counting net present value (NPV) and calculating the payback period. As it is known, NPV is a famous indicator of appraising the effectiveness of any investment project. “Net present value (NPV) is a way of comparing the value of money now with the value of money in the future. A dollar today is worth more than a dollar in the future, because inflation erodes the buying power of the future money, while money available today can be invested and grow”.

The NPV can be calculated using the following formula:

NPV calculating formula

The payback period of any investment project can be computed using the following formula:

Payback period calculating formula

The company may solve the mentioned complexities with a deep analysis of possible ways of attracting financial resources. As it is known, the firm makes its choice based on several criteria, including the cost of different sources of financing and their riskiness. Other complexities may be addressed by hiring qualified managers who are able to use the mentioned tools of assessment of the investment projects.

Creating a Convergence between the Interests of Stockholders and Managers

It should be stated that the company’s stockholders and its managers have different interests. The former is interested in the maximization of the firm’s net income and, consequently, their dividends that depend on it. The company’s managers, in their turn, are interested in maximizing their salary and scale of the business activity. However, as it is known, the firm maximizes its income when the difference between its total sales and total costs is the biggest. It means that consistent rising of the company’s scale of activity increases its income to a certain limit. Then, the firm’s income reduces with further increasing scale of activity.

That is why it is very important to create a convergence between the interests of the company’s stockholders and its managers. It can be done by setting a strong correlation between the managers’ salary and the firm’s income. For example, the managers’ salary may be established as a percentage of the company’s net income.

Due to finding the mentioned convergence, the firm’s net income may be increased since the difference between its total revenue and the total cost will be enhanced. For example, General Motors has found the optimal correspondence between the stockholders’ profit, on the one hand, and the company’s social responsibility, on the other hand. The firm has made its vehicles ecologically cleaner. “Business firms cannot exist and profit in the long run without being socially responsible”. In addition, the concept of managerial ownership is currently quite popular. It indicates the balance between the stockholders’ and managers’ interests as both roles are of managers and stockholders are played by the same people.

To conclude, making a long-term investment decision is a difficult task that requires a deep analysis of all factors of the company’s activity. Such a decision is influenced by the changes in demand elasticity, government policy and regulations, complexities through assessment of investment projects, and other important factors.

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