Strategic Purchasing Development Scenario

Question: Discuss about the Strategic Purchasing for Development Scenario. Answer: Introduction: Fleisher and Bensoussan (2015) depicts that decision-making plays a crucial role in taking appropriate steps for better business outcome based on the market and economic indications. Businessperson also emphasizes on effective decision making so that better alternation tools can be evaluated that can be used to obtain the business goals. Gustafsson et al. 2013) on the other hand portray that with respect to capital budgeting techniques, the sensitive analysis is preferred by many business people for taking effective decisions. In this evaluation to types of variables are there- independent and dependent variable. Hull (2014) highlights that the effect of the independent variable on the dependent variable are analyzed based on certain circumstances so that future outcome can be controlled. Similarly, in business, if a management used sensitive analysis, it is used for measuring business uncertainties. Additionally, the technique of capital budgeting is also used by business experts for taking effective business decisions by estimating probable inflows and outflows considering the present monetary asset obtained by the organization for a certain project. Net Present Value, Internal Rate of Return and Pay Back Period are three techniques that are used for evaluating capital budgeting (Lam and Oshodi 2015). Goel (2015) furthermore explains that in this context, the sensitive analysis offers the provision of accurate understanding on trustworthy outcomes of the most effective investment alternatives. Andor et al. (2015) also describes that in order to generate covering the probable expenses, an organization involves in investment period return and financial effect; and it is the liability of that organization to formulate business decision for future by using standard internal rate and discounting rates according to the present monetary asset with the organization. Thus, this process of planning future decisions and analyzing present financial strength is the major concern of the sensitive analysis that considers the inflows and outflows of the budget. The outcome of the economy, interest rate, inflation rate, or foreign exchange fluctuation rate is based on the outcomes of those decisions. White and Miles (2015) highlights that risk is always associated with the estimation of the decision in terms of estimating sensitivity analysis on capital budgeting. Moreover, it is also not possible to estimate accurate estimation of the future profitability and undesirable business outcomes that affect the investment funds. Thus, in order to avoid such unfavorable business outcomes, businessperson uses the sensitivity analysis so that precise financial growth can be estimated within minimum costs rather than applying a risky way for attaining maximum profitability (Goel 2015). Taken for instance, in ASDA, managing authorities uses sensitive analysis for estimating future benefits with respect to debt and equity. If reduction of debt capital ratio by 10% is evaluated by the concept of sensitivity analysis, the average cost of capital will be 5.55% if it was considered that the value of debt is constant and the value of equity is increasing (Hull 2014). Scenario Analysis Fleisher and Bensoussan (2015) depicts that in order to estimate the anticipated value of an organizations performance for a specific interval of time, scenario analysis is done. One such business decision is the measurement of the portfolio measurement that emphasizes on the capital budgeting in order to take effective business decisions. Blobel and Frohlich (2017) thus portrays that managing authorities of an organization uses scenario analysis to measure risk factors on foreign exchange fluctuations, interest rate changes and inflate rates so that future risks can be avoided. The prime benefit of this approach is that the events of which net outcome of the proposed business projects is affected can be circumvented. Capital budgeting techniques also use to analyze profit maximization and investment opportunities that ensure the sustainable growth of the business. Lam and Oshodi (2015) furthermore depicts that concept like discounting method, line net present value, payback period o r internal rate of return is used by the business personnel to analyze the probable business outcome by considering all the associated risk factors. Fleisher and Bensoussan (2015) also suggest that risk can also be avoided if consequences of different modes of investment will be considered and scenario analysis helps the managing authorities to analyze those modes of investment. Businesspeople consider realistic capital budgeting and scenario analysis is used to determine probable factors for effective business decisions. Thus, base case, best case and worst case are the three types of scenarios that are use to evaluate the nature of projects and their outcomes (Blobel and Frhlich 2017). Taken, for example, is an economy is suffering from high inflation; it is probable that there is the low net present value of investment compared to the result of investment while the inflation is low. Thus, determination of scenario is important, whether it is the base, best or worst case. Sometimes, business decision makers consider multiple scenarios for the proposed projects to generate accurate outcomes. These decisions are based on several components of estimated cash flows relying on the same situation. Hull (2014) explains that is a person have proper knowledge of industrial benchmark; they are liable to analyze probability result that is based on macroeconomic factors like rate of foreign exchange, the rate of interest and rate of inflation. The example of Woolworths can also illustrate this that they use multiple scenario analyses and research on favorable and unfavorable factors regarding a number of retails stores, the location of the store, advertisement strategies, consumers demand and products incorporated in the stores along with the economic and realistic risks for operating the business. These risks are measured before investing in opening a new store. The probability of future income can also be evaluated with the help of decision tree, which is another method of the scenario analysis (Zabarankin et al. 2014). This tree analysis allows a business personnel to identify the factors of failure associated with a business decision that is useful for avoiding future and probab le economic risks so that better productivity and profitability can be attained (Fleisher and Bensoussan 2015). Similarities and differences between Capital Asset Pricing Model and Capital Market Line Capital Asset Pricing Model (CAPM) is a model used to evaluate the relationship between systematic risks of the investment and the expected return amount for the investment in terms of stock or securities (Zabarankin et al. 2014). Hull (2014) furthermore depicts that in order to attain realistic expected return, both systematic and unsystematic risk factors have to be considered. The capital budgeting technique can use these evaluations of the risk. Business people measure required rate of return by the Capital Asset Pricing Model so that proposed investment of the risky assets can be evaluated. Capital Market Line Gopalan et al. (2014) define the Capital Market Line as a tangent line that helps to determine market portfolio for proposed risky assets. The term tangent line is used as this line is drawn from a risk-free point to the feasible region, where there is a probability of the occurrence of the investments. Thus, Khavul and Deeds (2016) depicts that point of the combination of market portfolio and risk-free assets from a tangent line represents the Capital Market Line and it is also known as "rate of return." This line represents the risk factor to measure the fair value of investment through the model of Capital Asset Pricing Model in comparison with the market price. Moreover, it can be concluded that Capital Asset Pricing Model (CAPM) and Capital Market Line (CML) are used to determine required rate of return and market portfolio respectively, but these models have certain similarities and differences in order to evaluate expected the return of the proposed investments. Khavul and Deeds (2016) also explains that anticipated return of the investment in equity is also measured by the Capital Asset Pricing Model (CAPM) to find out the risk-free rate of return, risk variance and the anticipated market return. These factors are denoted by beta(). Re = Rf + B [E (Rm) Rf] is the formula use to find out the expected return of the investment portfolio. Where, Re- Denoted for Return on equity Rf- Denoted for Risk-free rate of the securities E (Rm) - Denoted for Expected rate of return on the portfolio of market B- Denoted for Beta coefficient and B [E (Rm) Rf]- illustrates the difference between for expected rate of return on the portfolio of market and risk-free rate of the securities also known as market premium. In addition to that, CAPM model is also used for plotting beta on one axis and the anticipated stock return on other axis and this tangent line is represented by the Capital Market Line. The slope that is drawn by the capital market line illustrates the market premium so that values for overvaluation or undervaluation associated with the proposed investment can be estimated accurately for effective business decision. Fajar Pasaribu et al. (2015) depicts that a business person has to consider the total risk of security to measure the expected return of the proposed investment securities. These total risks are categorized by two classifications- systematic risk and unsystematic risk. The variance if risks are evaluated by the beta coefficient in the total measurement of the risks that helps in evaluating the sensitivity of the securities due to the change of market risk and market return (Zabarankin et al. 2014). The expected return of the proposed investment is determined by the Capital Asset Pricing Model and is graphically represented by the Capital Market Line. Systematic risk in security investment is majorly seen in the market that cannot be diversified and unsystematic risks are related to the particular stock that can be diversified by considering the diversification process in investment. Moreover, systematic risk of the securities is represented by the coefficient of beta that is determin ed by the market variance along with the covariance of market securities (Huesecken et al. 2016). Erel et al. (2015.) furthermore depict that overall anticipated rate of return of the investment securities and their associated risk factors can be determined by the relationship between CAPM and CML. It can also be said that the Capital Market Line can estimate overvaluation or undervaluation of securities. Fajar Pasaribu et al. (2015) also highlights the fact that security is said to be undervalued if the expected rate of return of security in contradiction of its associated risk components is drawn over the capital market line. However, security is said to be overvalued if the expected rate of return of security in contradiction of its associated risk components is drawn below the capital market line (Niehaus 2014). Thus, it now becomes easy to measure the small amount of risk related to business decisions (Goel 2015). In addition to that, the two concerned model that is Capital Asset Pricing Model and Capital Market Line have certain similarities but is different from each other based on certain terms (Baldock 2016). Goel (2015) also highlight that Capital Market Line (CML) represents the securities value while the Capital Asset Pricing Model (CAPM) illustrates expected the return of the security. Moreover, Capital Market Line (CML) considers the entire market and systematic risk and risk-free rate of securities is considered by Capital Asset Pricing Model (CAPM) (Erel et al. 2015). It can also be stated that the performance of the investment portfolio is evaluated by the Capital Market Line by using the capital budgeting technique. This technique will also help the business person in evaluating the over or under valuation of proposed securities. While on the other hand, CAPM model is only used to determine the risk tolerance with the current market risk factor and expected the return of offered s ecurities (Baldock 2016). Lastly, Lanteri (2016) stated that Capital Market Line illustrates the investment portfolio more efficiently as a factor of the economic inflation rate and overall market risk is considered. However, in terms of accurate measurement of the market premium rate and the current risk of the stock, Capital Asset Pricing Model shows more accuracy. Thus, if the assessment of the overall market for the investment purpose is concerned, CAPM model does not perform well. However, Erel et al. (2015) state that consideration of both CML and CAPMresults in the efficiency of the investment return and efficiency of the investors respectively for evaluating the risk associated with the business and its solution to overcome the negative outcome of the business. Reference Lists Andor, G., Mohanty, S.K. and Toth, T., 2015. 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