Developing the Current Operations
One way to develop a current operation is to realize economies of scale, to be able to realize the company must have a large production volume or have sufficient production volume so that cost savings can be realized.
The Industrial are sometimes able to implement and sometimes not capable to implement, when enterprise is not able to make cost saving from economies of sale by itself, then allowed joining a strategic alliance with another company until the company has enough volume to be able to increase the cost advantages from economies of scale.
To realize economies of scale, the company may merge with another company as its partner. This is because to achieve the necessary economies of scale large volume production, so that large volumes of Company Production then the company should dominate the industry.
Generally one company is not able to dominate the industry, one of which is caused by the presence of anti-government regulation of monopoly. Although technology is a special section for the company in general, no single company is able to generate sufficient demand in realizing economies of scale, so that in such circumstances that the company should work together to form an alliance that is useful to realize economies of scale.
Another way in developing the current operations is learn from competitors. Each company has different resources and capabilities, from resources owned can become competitive advantages for companies compared with other companies.
The last way in developing the current operations is the sharing of costs and risks if the company produces its own product, not only will the cost is great but will also bear the risk. So with the alliance, then the cost of these can be shared with other companies, as well as the risk of failure.
Capital Budgeting Steps
Is the overall process of planning and decision-making regarding the expenditure of funds where the funds return period exceeding one year. Period of one year limit is not absolute. Including group’s expenditures and this is the expenditure of funds for the purchase of fixed assets (plant investment), i.e. land, buildings, machinery and other equipment. Similarly, advertisement expenditure of funds for long-term projects, research and development as well as in the “capital budgeting expenditures”
Capital Budgeting Steps:
- The costs of project must be determined
- Management must estimate the cash flow expected from the project, including the final value of assets
- The risk of the project’s cash flow must be estimated. (Using the probability distribution of cash flow)
- By knowing the risks of the project, management must determine the cost of capital (cost of capital) that the right to discount the project cash flow.
- By using the time value of money, cash flow is expected to be used to estimate the value of the assets.
- Finally, the present value of expected cash flows compared with the costs.