Cost Management and Investment in Risk Averse Industry; Microsoft Case Study
Executive summary
Microsoft has been chosen for the industry. It is one of the best technology companies in the world. The cost management if the company is recommended with less amount of investment in those projects which are more prone to risk. This will help the company in a managing team of the company is recommended to take proper control over the loses arising out of the improper strategy. Again, the project selection could be done by the company in against of the trend analysis. This analysis needs to be done in order to determine the best position of the investment in the company. there is a significant impact of this activity. Funding options could go with equity funding. This is because it creates less pressure on the company. under this funding, method the company uses shares to the general public in order to raise capital for the business.
Again, this capital is used by the company in injecting capital fur several projects undertaken by the company. This is also called owners fund. Before starting a project, a company has to undergo several challenges. There is a different process for each project undertaken by the company. implementation has the risk of proper procurement of the resources to start the project. On the other hand, it could be seen that the project completion date is fixed or not. There needs to be a proper plan for the commencement of the work. Always an alternate plan could be available for the project. Infrastructural development could be done by the company. there has been a lot done by the company in the context of the cybersecurity. Apple could invest in this project as the IRR is 0.43 percent. This is a positive internal rate of return. The total payback period for the company is 2.51. this means that it could bring a fast return on the investment.
Every company follows a particular strategy to bring the best out of the selec5ed project. This paper will analyze the strategies of the Microsoft Corporation which is a technology-based company. It is an American company which is headquartered in Washington. It used to develop licenses, manufactures, sells and supports computer software, personal computers, and consumer electronics. It is founded on 4th April 1975 and it has 134944 employees recently according to the 2018 annual report. The share if the company is increasing since CEO Satya Nadella has taken the position as CEO of the company. This paper will analyse several aspects of the organization. It includes the project selection technique of the company and cost management. Further, it will focus on funding technique and winding up and implementation process of the company. There will be a recommendation for the company after analysing the above things.
Project selection
Microsoft is well known for the operating system market for personal computers. It has been dominant over many of the technology companies like IBM. The major reason is the selection of projects that brings them the utmost profit. The practices that could be suited for the Microsoft are:
Figure 1: Project selection practices
(source: self-created)
Benefit measurement– This needs to be followed by the company in order to seek the best result of the project selected. This has been done by the company in its previous projects like MSN and Azure. This helps the company in acquiring a huge market base (Kerzner, 2017).
Optimum utilization of resource– The firm needs to involve in practices that could help them to best utilize their available resources. This the major USP of the company. It utilizes both of its human resources and capital resource optimally. This helps the company to seek the profit they want from their project.
The tools that reused by the company to make the practices sounder is:
Easy access- The projects that are developed by the company are user-friendly. There are several guidelines for the usual software. It helps the customers to easily attach to the product. The products are served with a lot of helping tools that keep the customers using the product without any major difficulty (Kostalova et al. 2015). There are options available in order to ask help in the product or software itself.
Reasonable prices- Prices need to be matched with the competitors’ prices. Microsoft uses this tool to provide the best experience to the customers in their budget. It is the most used tool of the business. It could be seen in the previous projects taken by the company. it is the most effective measure to reach the customers. It helps in fixing the mass consumer size for the organization.
Under the analysis, it has been found that cybersecurity is one if the prominent practice of the company. the company is innovating itself to provide the best security services to their customers. The company has started Cybersecurity Tech Accord. This has been signed by a global organization including in counting. It has also announced defending democracy programs that work with the government of several countries (Fang and Zhang, 2016). Account guard is also introduced which is the service of advanced protections to the US political campaigns. [Referred to appendix 1]
Cost management
This refers to the practice of managing the budget of the project. This is an important ingredient in the course of the project. There is a great role played by the cist manger in handling this. The role and importance of cost manager are discussed below:
Helps in finding deviation– cost manager has the responsibility to fix the budget for the projects. the standard budget is being fixed by them. After fixing the budget the actual expenses are being matched with the fixed budget. This helps in finding the deviations. After finding the deviation the correct measure could be taken for the deviation (Zailani et al. 2016).
Fixing the budget and keeping cost balance- cost is being kept balanced by the cost manger. It helps them to seek the advantage of keeping the cost of the organizations. It helps in arising case of the marginal cost for any project. The budget is allocated and with the given time frame it is completed. This all happens because of the project manager.
Strategies that could be used for managing the cost:
- Fixing the standard budget for the projects
- Measure g the deviation against the planned budget.
- Taking corrective steps for the deviations raised by the project over the planned budget
Microsoft is recommended to take the projects by investing ideas in the risk-oriented projects. this could be done by managing the labour cost of the company. the company has invested in the dividend reinvestment with the amount of $100. The costs that are associated with the project need to be managed properly. The initial investment could be done by assessing the NPV of the project. This could help the company is mitigating the cost of the projects it takes. It has lost the majority in the 2015 operating system over Android. $8.5 billion has been incorporated in the project. This has led to a major loss in the year 2015. Therefore, the initial investment could be managed by the project (Avdoshin and Pesotskaya, 2016). It will help in reducing the risk of the loss from the project. There are probable chances if further growth of the company. This is because the balanced amount of the project could help in allocating the rest resources in other valuable projects.
Funding
There are several ways to fund a project. companies use the source according to their convenience and need. Major finding techniques are shown below:
Equity funding- under this funding method the company uses shares to the general public in order to raise capital for the business. Again, this capital is used by the company in injecting capital fur several projects undertaken by the company. This is also called owners fund.
Benefits of this funding are:
- It does not raise the obligations of the company.
- The investors have voting right in the company.
- there is less risk associated with this funding as there is no fixed or compulsory payment.
- A large amount of cost is being generated from issuing shares in the market. A huge amount of cash could be injected into the capital structure of the company.
Debt funding- Debt funding raises the obligations of the business. Debentures are a major example of debt funding. Companies also use bank borrowing by keeping a heavy number of mortgages with the banks. This has the compulsory payment towards the creditors. There is a fixed interest rate that needs to be paid by the company (Barrett, 2016). This also called the borrowed fund for the business. It has also great potential to increase the capital structure of the company by injecting capital into it. [Referred to appendix 2]
The benefit of the debt fund is:
- The benefit of the debt fund is that it helps to seek tax benefits in the long run.
- There is scope for both capital gain and loss.
- After three year or equal to three years, it is being at 20 percent or 10 percent after the indexation
- The longer the holding period the longer will be the ideation benefit
Microsoft mostly uses the equity fund along with the debt fund. It helps the company in determining the best capital structure for the company (Kouziokas, 2016). The implication of the equity fund option for the company is:
- There is no compulsory payment to the investors or the shareholders.
- The dividend is distributed according to the profit earned by the company.
- It has not created a compulsory burden on the company.
The other portions are the debenture holders available to the company. This has the following implications:
- It has created a burden on the company.
- The capital has also raised by this practice.
- The company has to pay a fixed rate of interest to the debenture holders.
- Taxation benefit has also achieved by the company on the long-term debenture holders
- It could not make a desirable withdrawal from the fund (Cakir, 2016).
Winding up and implementation
Before starting a project, a company has to undergo several challenges. There is a different process for each project undertaken by the company. The process is discussed below:
- Appointment of the project and executive manager
- Capturing of previous lessons
- Appointing and designing the project management team
- Preparing the plan
- Selecting the plan and collecting brief of the project
- Planning the initial stage.
The issues related to the project starting are:
- Procuring the resources
- Making the management team
- There could be a shortage if the resources to start the project (Themsen and Skærbæk, 2018)
The prices for the project completion are shown below:
- Project completion phase- Under a project it has several phases, there need to be the proper time for each phase to close
- Project completion- After the completion of the project, the closure process needs to be appointed.
- Project termination- again if there is the termination of the project, a project process that is close needs to be implemented.
Issues related to project completion are:
- This is a problem if the project is not completed on time.
- The resources need to be assembled after the project completion.
- Matching the standard and the target budget need to be performed.
- The project could be stooped due to the unavailability of the resources
The infrastructure consideration for the completion of the project are:
Technological consideration- Technologies are the major source for the organization under both the process. These processes are commencement and starting of the project. It helps to develop the quality of the project. Technology brings the best out of the product. Microsoft uses this infrastructure to complete and start the project. The technologies of the company have made a great impact on people’s life (Earley et al. 2016). There are many companies that are using this infrastructure to structure of their project to the management process. Digital technology has a great role in transforming industries. Therefore, Microsoft also uses this technology to satisfy their infrastructural wants.
Cloud infrastructure- This is widely used by the company to complete its project. The company has produced the world first supercomputer called AI in Azure. Therefore, the cloud is the most important infrastructure of the company to complete its project.
There is no significant impact of climate change on the climate. However, the procurement of certain parts may be affected by bad weather. This is because it could create a problem in transporting the required resource. (Microsoft, 2019)
a) Equity capital
The firm uses equity financing because of the following reasons:
Short term needs- This is used by the company to pay the short-term bills. This is the major source of funding the capital structure of the company. They sell the ownership of the company in the company itself. This is done in consideration with the return of cash to the investors who invest in buying the shares.
Fund requirement– It is also used by the company in funding the projects. This helps to raise the capital of the business. All the activities could not be started with the operating revenue of the company.
The shares of Apple are showing the summary of strong buy since the last month. The percent ratio of the company shows that it has got lower to 790.50 or there is a -1.19 percent decrease in the value of the shares (Themsen and Skærbæk, 2018) However, there is a strong buy for the company. it has happened because of the decrease in the sales of the company in the last few months due to the high process.
b) Question and answer
i)FCF
The free cash flow for the company has been found as -6.3 for the zero periods. Again, fur the first period FCF is 0.792. Fur the second period it is 0.792. The third period FCF is 0.792 and fir the 4th period it is 3.092. It could be seen that free cash flow for the project is showing a rising amount of cash flow fur each investment period. [Referred to excel sheet]
ii)NPV of the project
The NPV of this project is -2.218535619. This being assessed on the basis of the information given. the IRR achieved from this investment is -13 percent.
iii)investment analysis
Apple could invest in this project as the IRR is -13 percent. This is a negative internal rate of return. This means that it could not bring a fast return on the investment. The net present value computed for the project is -2.218535619. There is a positive return on the net present value. The most important thing is that it brings cash inflow in the project. Therefore, this project could not be chosen for investment. It has a well-maintained return on the invested amount. The amount received as NPV is a bit less than the capital expenditure made on the project. Therefore, this could have opted for the investment.
iv)Funding options
Equity funding is cheaper than bond funding. This being shown under the calculation. The free cash flow of the company has also been reduced. On the other hand, the internal rate of return of the company has come to a negative ratio. The ratio of IRR under bond is – 21 percent. This brings very little of the invested amount.
The NPV amount of the project has also come down. The amount is calculated as -3.416744758. This is due to the extra burden that has raised by the bond funding. It creates more outflow for the project. This is the reason equity could be said as suitable for the project.
Recommendation and conclusion
It is recommended for the cost management to look after the projects with less investment in the initial period. This is because there is uncertainty with the project that will be successful or not. On the other hand, the project could be selected by the company by checking the beneficial side of the project. Funding could be done with the equity fund. This will help the company to manage the risk of the fixed payment toward the fund or cash gained. It helps in the growth and development of the company. There has been a consideration on the resources before starting and ending the project. The technology could be used by the business in order to seek the best advantage in the competitive era. Apple needs to cover the equity option for funding the project. The second of funding it with the bond could be seen reducing the NPV amount. Microsoft mostly uses the equity fund along with the debt fund. It helps the company in determining the best capital structure for the company. Debt funding raises the obligations of the business. Debentures are a major example of debt funding. Companies also use bank borrowing by keeping a heavy number of mortgages with the banks. This has the compulsory payment towards the creditors. There is a fixed interest rate that needs to be paid by the company. Microsoft is recommended to take the projects by investing ideas in the risk-oriented projects. this could be done by managing the labour cost of the company. The company has invested in the dividend reinvestment with the amount of $100. The costs that are associated with the project need to be managed properly. This will help in the efficient management of the departments of the company. there could be possible chances of increasing benefits from the projects.
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