Introduction To Common Capital Investment Valuation Techniques Finance Essay - Free Essay Example

Sample details Pages: 9 Words: 2740 Downloads: 5 Date added: 2017/06/26 Category Finance Essay Type Argumentative essay Did you like this example? Every profit-oriented company faces the inevitable questions, whether to invest in long-term, short-term assets or in a project or not and which project is more profitable to invest in. These questions lead the potential investor to the necessity of investment valuation and investment comparison. Generally speaking the objectives of such valuation are to measure the expenditures and probable profits of the particular investment and its alternatives, choose one or a combination and make the most suitable with regard to companys strategic goals and financial situation decision. The practice of Discounted Cash Flow method is based on a concept of Net Present Value. Which is the difference between the Present Value of future cash flows and the initial investment required to undertake a project. [Corporate Finance p. 13] it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met. Don’t waste time! Our writers will create an original "Introduction To Common Capital Investment Valuation Techniques Finance Essay" essay for you Create order NPV method computes Present Value of all expected future cash flows using a minimum desired rate of return. Discount rate of return depends on the risk of a proposed project the higher the risk the higher the rate. Net Present Value is calculated with accordance to the following formula: NPV Where I0 is the initial investment, CF is a cash flow, n is a project expected life, t is a period respective to cash inflow, r is the discount rate appropriate given the riskiness of the cash flow and t is the life of the asset. Net Present Value provides an understanding of cash flows amount in present value terms upon the fulfillment of the project. Net Present Value is determined by income amounts, payback time (Discounting reduces the value of future cash flows to a present value equivalent and so is clearly concerned with the timing of the cash flows.) discount rate. traditional valuation methodology relying on a discounted cash flow. IRR, Advantages and disadvantages This chapter is dedicated to more detailed analysis of the various investment valuation methods, disclosing their positive and negative sides in terms of reflecting the reality and way of application. One of the major disadvantages of all the theoretical methods is their assumptions. The nature and number of assumptions are the factors that define the practical effectives of a theoretical method. As in the previous chapter Discounted Cash Flow is the first to be discussed. Many analysts share the same opinion, that in many instances Discounted Cash Flow DCF method does not capture the realistic valuation of an investment. All or nothing strategy [Mun.p.57], what actually means that Discounted Cash flow exclude management flexibility from the valuation. Other disadvantages of the method are presented here. Disadvantages and difficulties of Discounted Cash Flow method. Discounted Cash Flow method doesnt take into consideration the uncertainty and variability of future outcomes. The assumption is that cash inflows and outflows are fixed and cant be changed within the lifetime of a project, but in real world outcome is probabilistic, rather than deterministic. However, the actual business environment is highly fluid, and if management has the flexibility to make appropriate changes when conditions differ, then there is indeed value in flexibility, a value that will be grossly underestimated using a discounted cash flow model. This assumption leads us to the next problem, how to calculate cash flows as accurate as possible? Another assumption implies that future cash flows are easy to calculate. When in reality it is actually quite a task to make accurate predictions about cash inflows and outflows as they are subject to changes as well as different types of risks. Herein lies another problem: forecasting the relevant free cash flows and deciding if they should be discounted on a continuous basis or a discrete basis, versus using end-of-year or midyear conventions. Free cash flows should be net of taxes, with the relevant noncash expenses added back.5 Because free cash flows are generally calculated starting with revenues and proceeding through direct cost of goods sold, operating expenses, depreciation expenses, interest payments, taxes, and so forth, there is certainly room for mistakes to compound over time. A recommended method is not to create single-point estimates of cash flows at certain time periods but to use Monte Carlo simulation and assess the relevant probabilities of cash flow events. In addition, because cash flows in the distant future are certainly riskier than in the near future, the relevant discount rate should also change to reflect this. Instead of using a single discount rate for all future cash flow events, the discount rate should incorporate the changing risk structure of cash flows over time. This can be done by either weighing the cash flow streams probabilistic risks (standard deviations of forecast distributions) or using a stepwise technique of adding the maturity risk premium inherent in U.S. Treasury securities at different maturity periods. This bootstrapping approach allows the analyst to incorporate what the market experts predict the future market risk structure looks like. Finally, the issue of terminal value is of major concern for anyone using a discounted cash flow model. Several methods of calculating terminal values exist, such as the Gordon constant growth model (GGM), zero growth perpetuity consul, and the supernormal growth models. The GGM is the most widely used, where at the end of a series of forecast cash flows, the GGM assumes that cash flow growth will be constant through perpetuity. The GGM is calculated as the free cash flow at the end of the forecast period multiplied by a relative growth rate, divided by the discount rate less the long-term growth rate. Shown in Figure 2.2, we see that the GGM breaks down when the long-term growth rate exceeds the discount rate. This growth rate is also assumed to be fixed, and the entire terminal value is highly sensitive to this growth rate assumption. In the end, the value calculated is highly suspect because a small difference in growth rates will mean a significant fluctuation Traditional Valuation Approaches 63 in value. Perhaps a better method is to assume some type of growth curve in the free cash flow series. These growth curves can be obtained through some basic time-series analysis as well as using more advanced assumptions in stochastic modeling. Nonetheless, we see that even a well-known, generally accepted and applied discounted cash flow model has significant analytical restrictions and problems. These problems are rather significant and can compound over time, creating misleading results. It is as well assumed that management makes all the decisions at the beginning and sticks to them during the whole time. As it has been already mentioned cash flows are subject to different risks, which management should account for. The issue of risk is reflected in the equation of Net Present Value with the help of r (discount factor), but again it is assumed that there is only one source of risk, and it remains the same within the lifetime of s project. The problem of risk recognition, i.e. of discount factor is one of the central issues in DCF method. The crucial question is how to calculate the most appropriate discount rate? First of all it is important to differentiate the types of risks invilved. Prasan and Chandra [Project Valuation Using Real Options p.38] point out two types of risk: market risk and private risk. Market risk reflects market-driven factors, which can affect the outcome of a project, when private risk relates more to managerial issues. According to Prasan and Chandra the necessity of differentiation of these types of risks is explained by the fact, that investor doesnt consider private risk at all while estimating the risk premium he is ready to pay. According to Mun here are several models, which are used in order to calculate discount rate: Weighted Average Cost of Capital (WACC), Capital Asset-Pricing Model (CAPM), Multifactor Asset-Pricing Model (MAPT), Arbitrage Pricing Theory (APT). WACC calculation of a firms cost of capital in which each category of capital is proportionately weighted. The discount rate that is used is usually calculated from a WACC, capital asset-pricing model (CAPM), multifactor asset-pricing model (MAPT), or arbitrage pricing theory (APT), set by management as a requirement for the firm, or as a hurdle rate for specific projects.2 To determine an appropriate discount rate for valuing cashflows, a manager is confronted by three major problems: the risk premium must be estimated, an appropriate risk-free rate must be chosen (which reflects time value of money) and the beta of the project or company must be determined.In most circumstances, if we were to perform a simple discounted cash flow model, the most sensitive variable is usually the discount rate. The discount rate is also the most difficult variable to correctly quantify. Hence, this leaves the discount rate open to potential abuse and subjective manipulation. A target NPV value can be obtained by simply massaging the discount rate to a suitable level. In addition, certain input assumptions required to calculate the discount rate are also subject to question. For instance, in the WACC, the input for cost of common equity is usually derived using some form of the CAPM. In the CAPM, the infamous beta (_) is extremely difficult to calculate. In financial assets, we can obtain beta through a calculation of the covariance between a firms stock prices and the market portfolio, divided by the variance of the market portfolio. Beta is then a sensitivity factor measuring the co-movements of a firms equity prices with respect to the market. The problem is that equity prices change every few minutes! Depending on the time frame used for the calculation, beta may fluctuate wildly. In addition, for non-traded physical assets, we cannot reasonably calculate beta this way. Using a firms tradable financial assets beta as a proxy for the beta on a project within a firm that has many other projects is ill-advised. Secondly, discount rate depends on the magnitude of risk expected. At last A standard dividend discount model cannot handle dynamic betas, risk premiums or risk-free rates because, in this valuation method, future expected cashflows are valued at constant discount rates. Depending on the aim of DCF method application r could be calculated as Weighted Average Cost of Capital (WACC) or risk free rate or Certain problems arise from the above mentioned assumptions. Projects are mini firms, and they are interchangeable with whole firms. With the inclusion of network effects, diversification, interdependencies, and synergy, firms are portfolios of projects and their resulting cash flows. Sometimes projects cannot be evaluated as stand-alone cash flows. Project discount rate used is the opportunity cost of capital, which is proportional to non-diversifiable risk. There are multiple sources of business risks with different characteristics, and some are diversifiable across projects or time. All factors that could affect the outcome of the project and value to the investors are reflected in the DCF model through the NPV or IRR. Because of project complexity and so-called externalities, it may be difficult or impossible to quantify all factors in terms of incremental cash flows. Distributed, unplanned outcomes (e.g., strategic vision and entrepreneurial activity) can be significant and strategically important. Unknown, intangible, or immeasurable factors are valued at zero. Many of the important benefits are intangible assets or qualitative strategic positions. Traditional methods assume that the investment is an all-or- nothing strategy and do not account for managerial flexibility that exists such that management can alter the course of an investment over time when certain aspects of the projects uncertainty become known. There are several potential problem areas in using a traditional discounted cash flow calculation on strategic optionalities. These problems include undervaluing an asset that currently produces little or no cash flow, the nonconstant nature of the weighted average cost of capital discount rate through time, the estimation of an assets economic life, forecast errors in creating the future cash flows, and insufficient tests for plausibility of the final results. Discount factor the same for different type of assets. For instance, the NPV is calculated as the present value of future net free cash flows (benefits) less the present value of implementation costs (investment costs). However, in many instances, analysts tend to discount both benefits and investment costs at a single identical market risk-adjusted discount rate, usually the WACC. This, of course, is flawed. The benefits should be discounted at a market risk-adjusted discount rate like the WACC, but the investment cost should be discounted at a reinvestment rate similar to the risk-free rate. Cash flows that have market risks should be discounted at the market risk-adjusted rate, while cash flows that have private risks should be discounted at the risk-free rate. This is because the market will only compensate the firm for taking on the market risks but not private risks. It is usually assumed that the benefits are subject to market risks (because benefit free cash flows depend on market demand, market prices, and other exogenous market factors), while investment costs depend on internal private risks (such as the firms ability to complete building a project in a timely fashion or the costs and inefficiencies incurred beyond what is projected). On occasion, these implementation costs may also be discounted at a rate slightly higher than a risk-free rate, such as a money-market rate or at the opportunity cost of being able to invest the sum in another project yielding a particular interest rate. Suffice it to say that benefits and investment costs should be discounted at different rates if they are subject to different risks. Otherwise, discounting the costs at a much higher market risk-adjusted rate will reduce the costs significantly, making the project look as though it were more valuable than it actually is. At the same time Discounted Cash Flow method is not so popular due to its disadvantages. Advantages Discounted Cash Flow Advantages _ Clear, consistent decision criteria for all projects. _ Same results regardless of risk preferences of investors. _ Quantitative, decent level of precision, and economically rational. _ Not as vulnerable to accounting conventions (depreciation, inventory valuation, etc.). _ Factors in the time value of money and risk structures. _ Relatively simple, widely taught, widely accepted. _ Simple to explain to management: If benefits outweigh the costs, do it! Forecast the likely distribution prassan p.38 Corp finance: The goal of a corporation is to max value. A shareholder value maximizing investment rule is based on cash flows; taking into account time value of money; taking into account different risks. The npv rules meet all the requirements and directly measures the value for shareholders created by a project. 4.9 Advantages of NPV The advantages of NPV are as follows. ÃÆ' ´Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ Ãƒâ€šÃ‚   It is directly linked to the assumed objective of maximising shareholder wealth as it measures, in absolute () terms, the effect of taking on the project now, ie year 0 ÃÆ' ´Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ Ãƒâ€šÃ‚   It considers the time value of money, ie the further away the cash flow the less it is worth in present terms ÃÆ' ´Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ Ãƒâ€šÃ‚   It considers all relevant cash flows, so that it is unaffected by the accounting policies which cloud profit-based investment appraisal techniques such as ARR ÃÆ' ´Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ Ãƒâ€šÃ‚   Risk can be incorporated into decision making by adjusting the companys discount rate ÃÆ' ´Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ Ãƒâ€šÃ‚   It provides clear, unambiguous decisions, ie if the NPV is positive, accept; if it is negative, reject. 4.11 Advantages of DCF methods of appraisal Taking account of the time value of money (by discounting) is one of the principal advantages of the DCF appraisal method. Other advantages include the following. ÃÆ' ´Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ Ãƒâ€šÃ‚   The method uses all cash flows relating to the project ÃÆ' ´Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ Ãƒâ€šÃ‚   It allows for the timing of the cash flows ÃÆ' ´Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ Ãƒâ€šÃ‚   There are universally accepted methods of calculating the NPV and IRR Assumptions. DCF Assumptions Real Option Valuation Strategic value when there is a possibility to make contingent decisions. Summary Traditional analyses like the discounted cash flow are fraught with problems. They underestimate the flexibility value of a project and assume that all outcomes are static and all decisions made are irrevocable. In reality, business decisions are made in a highly fluid environment where uncertainties abound and management is always vigilant in making changes in decisions when the circumstances require a change. To value such decisions in a deterministic view may potentially grossly underestimate the true intrinsic value of a project. New sets of rules and methodology are required in light of these new managerial flexibilities. It should be emphasized that real options analysis builds upon traditional discounted cash flow analysis, providing value-added insights to decision-making. Comparison

The Decline Of The Roman Empire - 1845 Words

The decline of the Roman Empire marked an end to an age of peace and prosperity. Between the years 121 AD to 161 AD, Roman society was ruled under the â€Å"five good emperors† Nerva, Trajan, Hadrian, Antonius Pius, and Marcus Aurelius. Embodied with a wealth of wisdom and competence, the emperors brought Rome to its height of territorial expansion and stability. As the third century rolled around, the empire succumbed to a state of chaos and instability. Under the rule of the barrack emperors, Roman society was weakened by the greed and corruption of the leaders, as well by the ineffective public policy that was implemented. Aside from internal affairs, Rome also struggled with foreign pressures. Having one of the longest borders in history,†¦show more content†¦Aside from his discussion on the details surrounding the fall of the empire, Gibbon also ties in the causes to the decline of learning and genius during this period. It was a time when â€Å"a cloud of crit ics, of compilers, of commentators, darkened the face of learning, and the decline of genius was soon followed by the corruption of taste (Gibbon, 64).† Since the transition from the old Republic to the new empire, learning thrived throughout the land. Following the death of Mark Antony in 30 B.C., Octavian took control of the Senate and became Imperator, Augustus, and Principate. He held both political and divine power. More importantly, under the rule of Octavian we see the flourishing of literature, art and intellectual life. Having advanced communication and travel, the Romans were able to send letters and classical texts throughout different geographical regions. We witness a diffusion of Greek and Roman culture that would help to expand scientific, literate, and even philosophic thought as understood by the people. The Augustus age, spanning from 43 B.C to 18 A.D, signified a â€Å"golden age of literature†. As Gibbon describes it, â€Å"Homer as well as Virgil were transcribed and studied on the banks of the Rhine and Danube (Gibbon, 63). The contributions of earlier intellectual thinkers, such as Aristotle and Plato diffused all throughout Roman society. As the Phil-Hellenist movement heightened the awareness of GreekShow MoreRelatedThe Decline Of The Roman Empire1463 Words   |  6 PagesWhat were the most important reasons for the decline of the Roman Empire? Why? The fall of the Western Roman Empire is a very broad topic because there were a multitude of continuous events that led to the disappearance of one of the most legendary empires of the world. The seemingly unstoppable Roman Empire would fall due to the fact that many aspects that made Rome such a dominant empire began to fade. Rome was the center of the world and the thought that such a power in the world could decreaseRe ad MoreThe Decline Of The Roman Empire Essay1768 Words   |  8 Pages The Roman Empire was or could be one of the greatest empires to have ever existed to this day. Just like many empires the Roman Empire fell to betrayal, religion, and war. Lasting from 27BC to 1453 the Roman Empire to me is the most interesting empire to talk about. When you take any history class that explores times outside the US, you hear about the Roman Empire being involved some way or somehow. The Roman Empire history can go on for days. I will pack most of the history into a small 5 pageRead MoreThe Decline Of The Roman Empire1020 Words   |  5 Pages Emperor reforms, outside invasions and financial weakness ultimately caused the decline of the Roman Empire in the West, because each of these events chipped away at the center and the longevity of the Roman Empire from 180 AD to the early fifth century. After the death of the last of the five good emperors, Marcus Aurelius in 180 AD, the Roman Empire began to form into a military monarchy, which was not based on prior lineage but loyalty to the army. The familial aspects of choosing the next emperorRead MoreThe Decline Of The Roman Empire1437 Words   |  6 Pages It is incredible how once the most dominating Empire in the ancient world declined and fell apart so suddenly. The Roman Empire lasted from 31 BCE to 476 CE and controlled most of the Mediterranean world. It was founded when Augustus Caesar converted the conflicted and split Rome into an Empire. At one point, it was the greatest Empire with extraordinary power†¦ But then everything changed. This is due to multiple issues within Rome itself and outside of it as well. First of all,Read MoreThe Decline Of The Roman Empire2298 Words   |  10 Pagestheories on the decline of the Roman Empire and whether or not it completely fell. There are many differe nt theories why the Roman Empire collapsed and what caused it to happened such as military failure, invasions of Barbarians, political problems, economic problems, and the spread of Christianity. Prior to the invasion and fall of the Roman Empire, the economy was crumbling and Rome was headed into a decline. The Empire split into two empires, the Byzantine (Eastern) and the Roman (Western), inRead MoreThe Decline And Fall Of The Roman Empire913 Words   |  4 Pages A consistent measure throughout all history has been that all great empires fall. Many theories have been given to why the empire fell, but Gibbons famous book, The Decline and Fall of the Roman Empire, provides reasoning for what we consider as why Rome fell. Even though there was an inconsistency of leadership, the main reason for the decline of the Roman Empire was due to the size of the empire. 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Various reasons for its success, such as the army, the daily life and the Pax Romana, left a blueprint for how to rule the world. These reasons leave many learners questioning how it could possibly cease to rule for longer than it did. ConspiracyRead MoreThe Decline Of The Roman Empire797 Words   |  4 Pages As the Roman Empire was closing out the end of the third century they were faced with both internal and external concerns (Irvin, History of the World Christian Movement, 160). Some of the contributing factors to the rise of Constantine begun with the wars with the Persians that they were facing, in addition to managing the northern Germanic tribes which contained many of the Roman military resources (Irvin, History of the World Christian Movement, 160). 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Face Recognition Study Inverted V Upright Faces. free essay sample

Face recognition study: Inverted V Upright faces. Introduction: Face recognition is a difficult visual representation task in large part because it requires differentiating among objects which vary only subtly from each other. This particular face recognition study was expected to suggest that people recognise inverted faces less accurately than upright faces. The study involved sixty different faces observed on a computer screen by a sample of first-year university students. Hypothesis: The hypothesis for this study stated that it is expected that people recognise inverted faces less accurately than upright faces. The null hypothesis stated that there would be no difference in the amount of faces recognised regardless of whether they were upright or inverted and that if there was to be any difference that it would be down to chance. Method: Participants: The sample used consisted of 15 first-year psychology students of mixed ages. Gender or race held no significance for this study. We will write a custom essay sample on Face Recognition Study: Inverted V Upright Faces. or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The psychology students used participated in the experiment in there seminar groups at allocated times throughout a timetabled week. Materials: The materials used for this study consisted of the e-pro computer programme which was used in order to display the faces required for the experiment. Furthermore, the results of the study were interpreted using the SPSS computer software. Procedure: For the first part of the experiment, sixty faces, thirty of which were upright and thirty of which were inverted were displayed on a computer creen for two seconds per face. After each participant had viewed the full sixty faces, a distracter task was then issued to them in order to remove any short-term memory effects on facial recognition. The distracter task consisted of a series of personal questions and lasted for roughly five minutes. Upon completion of the distracter task, the second part of the experiment took place. During the second phase of the experiment, sixty of the previous faces w ere shown alongside a set of sixty new faces. Participants were asked to say whether or not they recognised the faces from the earlier stage of the task. Results: The mean number of recognised inverted faces was 0. 67 with a standard deviation of 0. 07. The mean number of recognised upright faces was 0. 74 with a standard deviation of 0. 05 ? Figure 1 shows the mean value for facial recognition of upright faces to be significantly higher than that of inverted faces: t(14) = 3. 55, p= 0. 03 Figure 1: Mean values of facial recognition for inverted and upright faces. Discussion: The results recorded from this study suggest that our hypothesis that people recognise inverted faces less accurately than upright faces may be correct. However, to be more certain that our hypothesis is accurate, it should be ensured that the experiment is repeated and that in this instance is counter-balanced across the whole sample of first-year psychology students collectively and not just within their seminar groups.

Leasing vs Purchasing free essay sample

There are no disposal fees because the leasing company will be responsible for the equipment leased. By replacing the current sever setup ( the company has over a dozen machines running 24 hours every day), with new leased IBM compact server, we will cut power costs by up to 50%. Contents Summary2 Introduction4 Discussion4 Requirements Scope and Background4 requirements to be achieved:4 several leasing and finance companies with the best solutions for the company4 Salary Expense Before Leasing fig 15 Salary Expense After Leasing fig 25 Leasing and Financing Programs7 Leasing and Financing fig37 benefits of hiring a leasing company:8 Conclusion9 Bibliography10 Appendix A11 Introduction This report explores the methods other companies use to conserve working capital. The recommendation is to lease to keep the company at the forefront of the technology curve, and keep working capital free. The company will also have the option to upgrade equipment when the next advancement occurs at a fraction of the purchase price of the same equipment. We will write a custom essay sample on Leasing vs Purchasing or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Leasing computer equipment and technology protects the company from equipment obsolescence. In the past, we have purchased all of our IT equipment. This strategy has periodically put a drain on working capital. This type of bulk spending leaves the company in a weak financial position. The company saves a huge amount of money releasing these expenditures. We propose a way to manage this process with ease and greater forecast accuracy. Discussion Recently equipment disposal has become a problem. Last year the company cycled out 35 laptops due to obsolescence. The company had to pay an independent company a removal fee because of the chemicals in the LCD screens of our machines. The servers were experiencing terrible latency times. Downtime for maintaining the databases have caused confusion and inefficiency with the management staff and sales team. The company’s IT staff has almost tripled in the past 5 years as it struggles to maintain databases, software, and equipment. Leasing equipment with â€Å"Coupled IT Services† reduce salary expenses by 33%. We have interviewed several good leasing companies who finance, as well as service the equipment leased (see Attachment 1 for the IBM breakdown on lease partnerships). Requirements Scope and Background requirements to be achieved: * 25% Working capital output reduction for IT equipment * Comply with new company wide â€Å"Green Initiative† * Simplify computer upgrades * Increase IT efficiency everal leasing and finance companies with the best solutions for the company * PC Mall (online) * IBM * HP * Cisco The new mandates initiated by the company we investigated found that leasing IT equipment fits well into the new direction. By testing the energy output of the old equipment and newly leased machines, studies show that the newer equipment outperformed the old equipment. The leasing of computer equipment saves the company money and resources and the environment. By utilizing one of the leasing and financing companies, we will outsource 33% of internal IT staffing. Releasing five to seven IT specialists, the company will reduce salary expenses. â€Å"A holiday group has calculated that it has cut its IT costs by almost half by leasing its PC’s and software rather than buying. † [ (Mohamed, 2005) ] Salary Expense Before Leasing fig 1 Salary Expense After Leasing fig 2 Leasing and Financing Programs In the current state of the economy, there are many businesses that have closed their doors. We would like to prevent this by presenting a way to reduce expenses. â€Å"†¦leasing can provide financing – in some cases up to 100% of the acquisition cost – when bank credit is scarce. And turnkey leasing programs roll the acquisition, maintenance, upgrading and reselling of equipment into one package. † [ (Couretas, 1997) ] Leasing and Financing Programs in Q3 fig 3 Leasing and Financing fig3 [ (PC Mall Leasing Options, 2009) ] The proposal is to lease the IT equipment using one of the companies in the illustration fig 3. We have spoken to the customer account representatives of the leasing companies. They are all very eager to schedule a consultation meeting with upper management and the IT department heads. [ (Leasing can help manage changing technology, 1997) ] Computer technology evolves rapidly. There is a distinct advancement year to year. Computers handle more processing power, use less energy, and depreciate like rocks falling off Pike’s Peak. Leasing helps prevent obsolescence. It offers an opportunity to upgrade equipment for a fraction of the cost of purchasing. With better equipment, the company stays ahead of the IT curve and improves on productivity from all departments that utilize the in house private network. IT equipment has an expected useful life of five to eight years. The company can use the current servers for the next three years with diminished productivity. The latency times with the current equipment is very slow compared to the new machines. Latency is the time taken for a packet of data to be transmitted. IBM has servers for lease that have some of the lowest latency times on the market. IBM also has a service included with the lease that allows you to upgrade the equipment. Therefore, in reality, leasing will prevent the company from purchasing, and spending working capital every three years. Satisfying the â€Å"Green House Initiative,† the servers we will upgrade to would reduce energy consumption by as much as 27%. The company can use this new technology until the new technology arrives. Using a leasing company as a remarketer of equipment is a â€Å"hedge against technological obsolescence’ for business, said Al Golembewski , first vice-president at Sanwa Business Credit Corp. in Chicago† [ (Couretas, 1997) ] We can decrease salary expense by leasing. There are several plans that account for the maintenance and upkeep of the software and equipment. The IT employees can focus on company owned equipment. Reducing the time spent repairing the network allows the company free up IT man-hours for use on in-house projects. We suggest the company release five of the fifteen IT professionals we have on staff to save over $250,000. Since leasing does not require the amount of money spent on purchasing, the company saves in that area as well. One main goal is to free up working capital. Two ways have been mentioned above. We lease for a low monthly fee, ($451 per month for a 36 month lease), and we use energy efficient machines. The IBM System x3850 is one such machine. It has a balanced design and it is scalable. In other words as the company needs more processing power, this machine can be upgraded to accommodate this need. Leasing does not require the amount of money spent on purchasing. The current server in use today cost $15,640 4 years ago. If the machine had been leased, the company would be ready today for a faster, more efficient, energy efficient machine. The costs associated with depreciation would also have been avoided. In 2001 Dick Wessel, senior sales consultant with Lewan and Associates, recommends leasing for expensive equipment. He said, â€Å"Most companies don’t want to write out a check for that; it’s much easier for them to make monthly payments, â€Å"he said. â€Å" Office equipment is a lot like automobiles – when you drive it off the lot, they depreciate by 40%† [ (Wolf, 2001) ]. The company could deduct monthly lease payments as an operating expense. benefits of hiring a leasing company: Event IT SERVICES: Delivery of hardware including consultancy, project-management, installation, and on-site support. IT managers will also note the availability of an ability to have the leasing company dispose of old equipment (see Custom Made Services). Continuity Services Reduces the impact of a disaster or huge interruption of IT infrastructure by providing functional replacement hardware and related services within the agreed time   Custom Made Services Custom made services like demo management, equipment management (disposal services) Tax Benefits Deduct monthly lease payments as an operating expense. Your monthly lease payments typically are tax deductible as a business expense (Consult your tax advisor). Cash Flow Predictability Reduce financial uncertainty and increase forecasting accuracy with consistent lease payments. Simplify Budget Approval Leases Can be categorized as operating expenses. (PC Mall Leasing Options, 2009) â€Å"For the dollar-value lease, customers simply put a dollar down to purchase the equipment at the end of the lease. The drawback of the arrangement is higher interest rates than customers get under the fair market/operating lease†¦However, there is a tax advantage for purchasing equipment or using a dollar-value lease that companies do not get with an operating lease. The tax advantage comes with the depreciation of the equipment. Businesses that use a dollar-value lease qualify for the tax advantage since the arrangement is equivalent to purchasing. † [ (Wolf, 2001) ] Conclusion Leasing reduces the output of working capital. We forecast that the company will use less of its dollars at one time. The company can spread its IT cost over a longer period. The company can manage this budget easier than budgeting for a huge purchase every two to three years. It is easy to get a leasing agreement than a loan for the purchase of IT equipment. Leasing allows the company to stay on the cutting edge of technology improving efficiency and productivity. From the facts presented in this report, the company should support the leasing of IT equipment. The company should we schedule a date and time with the IBM consultant immediately. Bibliography Aldridge, R. (2005, September). The ABCs of technology leasing . Technology amp; Learning , pp. 25-28. Contino, R. (2006). The Complete Equipment Leasing Handbook. Sarnac: AMACOM. Couretas, J. (1997, April 1). Leasing: Technology management tool. Crains Small business , 5 (3), p. 1. Kehrer, D. (2006). Guide to Leasing Computer and IT Equipment. Retrieved July 25, 2009, from Work. com: http://www. work. com/leasing-computer-and-it-equipment-1000/ Leasing can help manage changing technology. (1997, Nov 17). PC Week , p. 151. Mohamed, A. (2005, March 29). Holiday Group halves IT costs by leasing computers an software. Computer Weekly , p. 24. Nevitt, P. amp; Fabozzi, F. (2000). Equipment Leasing. Somerset: Wiley, John amp; Sons, Incorporated. PC Mall Leasing Options. (2009). Retrieved August 7, 2009, from PC Mall: http://www. pcmall. com/pcmall/promotions/custom~p~zero_apr. asp Wolf, J. (2001). Leasing office equipment gains popularity. Denver Business Journal , 19A. Appendix A Energy management strategies and data center complexities require new sol utions As a provider of specialist logistics servicesto the UK healthcare sector, Polar Speedneeded to be able to deliver levels of service that most mid-sized businesseswould struggle to achieve. With rapid year-on-year growth, the performance of itsexisting IT infrastructure was beginning tosuffer. Working with Omicron Solutions, anIBMBusiness Partner, the companyreplaced its existing servers with anIBMBladeCenter containing Intel Xeonprocessor-based blade servers, and afiber-connected IBMSystem Storageâ„ ¢DS3400 provides SAN storage for thewhole environment. The highly scalableIBMBladeCenter architecture is designedto support future growth with minimal addi-tional investment, saving data center spaceand reducing both electricity costs and thecarbon footprint. For enterprises today, reducing costsand complexity is key to maximizing the business value of IT systems andservices. One particular pain point applicable inthis context: energy costs in data cen-ters. Today’s data centers commonlygenerate 10 to 30 times the electricaloverhead of a typical office building1—the fastest-growing element of the datacenter cost picture. Already, electricitycosts are estimated by some analyststo account for roughly 40% of the totaldata center budget. This trend isthreatening fiscal resources that mightotherwise be allocated to revenue-generating services. Going green istherefore increasingly critical to achiev-ing and maintaining a competitiveadvantage. Exacerbating this challenge is the factthat many organizations continue tosuffer from server sprawl. When newservers are rolled out on a one-to-onebasis with new applications or services,overall costs become multiplied in pro-portion. Each server draws more powerand generates more heat, which in turnmust be dissipated—leading to furthercosts. Because hardware utilization tends tobe poorer for lower-end servers, thissituation also leads to suboptimal useof overall processing power, wastingprecious computational resources. Management and administration actionsare also inherently complicated, leadingto less agility in the pursuit of changingbusiness goals and strategies. Overall business resilience can bethreatened by poor energy management—many of today’s datacenters were simply not designed toscale in proportion to growing electricaldemands. For them, server sprawl asan ongoing situation can be potentiallycatastrophic. Finally, many of today’s organizationsare increasingly concerned with envi-ronmental stewardship—the generalresponsibility of the corporate sector toimprove ecological conditions by lower-ing energy consumption and reducingcarbon emissions—in order to helpachieve a sustainable, balanced worldfor future generations. Here, too, optimizing data centersthrough energy-efficient solutions canlead to substantial improvements. Going green leads not just to lowercosts, but also to lower carbon emissions—in short, a measurable envi-ronmental benefit for the host commu-nity and, in a larger sense, the globalecosystem. Page 2 And at a time when organizations com-pete in an increasingly green-consciousmarketplace, the organizations thathave moved to energy-efficiency solutions and strategies will be per-ceived more favorably by clients andcustomers—a clear competitive distinction. Why IBM? For these reasons, many organizationsare turning to IBMsolutions to consoli-date servers, lower overhead, simplifymanagement and spur business innovation. Organizations that have deployed other solutions will find that IBMoffersunique, compelling strengths andadvantages that generate overall gainsin many different business and techno-logical contexts. Among these core strengths are:? A comprehensive array of virtualiza-tion technologies, which can deliverdramatic improvements in hardwareutilization and energy efficiency.? Innovative processor and systemstechnologies designed to maximizecomputational power while minimiz-ing power requirements.? A full suite of tools capable of track-ing power consumption, heat outputand other variables, thus deliveringkey diagnostic and measurementinformation used to fulfill energy management strategies.? High scalability and consolidationcapabilities.? Storage solutions that scale effec-tively and integrate seamlessly withexisting infrastructures. With IBMSystemxâ„ ¢ andIBMBladeCenter ® systems,IBMPowerâ„ ¢ Systems, and leadingstorage solutions, enterprise-class ITcan be empowered as a superiorinstrument of business initiatives—moreenergy-efficient, more flexible and more powerful. Reduce complexity and enhance IT responsiveness How can organizations improve ITagility and minimize server sprawl? Onestrategy involves transforming physicalservers into multiple virtual servers, thenrunning them on a single host system. In this way, IT can add virtual servers tomatch the host’s processing power,and thus increase hardware utilization—maximizing asset ROI. According to one recent study con-ducted by IBM, up to 112Dell 1Uservers can be consolidated into anIBMBladeCenterJS22. ThisIBMBladeCenter solution delivers thesame computational power of the100+Dell servers, yet requires only afraction of the power and generates a fraction of the heat3—a clear win byany metric. IBM’s value proposition as a systemsprovider is also evident in the newPower 520 Express—i Edition ®Ã¢â‚¬â€anaffordable upgrade path for currentIBMAS/400 ®, IBMSystemi520 ®, andiSeries ® customers, who can leverageit to reduce server sprawl and the asso-ciated energy costs. It also enables anexceptionally diverse array of applica-tions and services from a single host. Colorado-based HealthTrans, a pharmacybenefits administrator, is responsible forprocessing 90 million claims annually. The computational challenges implied bythat workload are considerable, andHealthTrans was looking to improve itsoverall speed, flexibility, and capacity to achieve 24/7 claims processing availability. Their system selection? IBM Power 570,driven by IBM’s POWER6 processors andIBM PowerVM virtualization management. Since migrating from Sun servers to theIBM offering, HealthTrans has experi-enced higher application uptime, fasterperformance and enhanced flexibility,allowing for rapid capacity changes ondemand. Page 3 ] Furthermore, IBMBladeCenter S hasbuilt-in disk storage of up to 12 ter-abytes; competing HP solutions, bycontrast, must sacrifice blade servers toobtain extra storage. 4And helping toreduce management complexity is theIBMBladeCenter Open Fabric Manager,which simplifies I/O administration andworks with all IBMBladeCenterEthernet and Fiber Channel switchesand fabrics from leading vendors suchas Cisco, Nortel, and QLogic. Also new is the IBMPower Systemsline, which brings togetherIBMPOWER-driven IBMSystempâ„ ¢and Systemi offerings into a new, unified suite. The Power Systems linesupports three different operating systems—UNIX ®, IBMi, and Linux ®Ã¢â‚¬â€helping to maximize the total range ofapplications and services available fromeach server. With IBMPowerVMâ„ ¢,new virtual servers can be deployed farmore rapidly than new physicalservers—and each receives dynamicallocation of computing resources—such as memory—on demand. Perhaps the most common form ofserver sprawl revolves around low-end,x86 servers. Clients looking for excep-tionally high-end x86 servers designedfor mass consolidation should considerthe IBMSystemx3950 M2, which deliv-ers extraordinary virtualization perform-ance and scalability thanks to IBM’sfourth-generation eX4 technology, up to a full terabyte of RAM, and asmany as 16Quad Core Intel ® Xeon ®processors. Also available from IBM: BalancedConfiguration Units, which integrate dif-ferent systems and software, optimizedfor different business contexts. Theseunits are tested in advance and aredesigned to deliver specific perform-ance levels for their target services. For clients making the leap from alter-nate vendors to IBM,the transitionprocess doesn’t have to be a dauntingone. For such organizations, one optionsure to be attractive is IBMMakeoverServices, which are designed to opti-mize the transition process and thusreduce business risks and operationalcosts through the IBMMigrationFactory. 5 Increase energy efficiency and decreasecosts Getting the best business value from ITmeans more than just increasing powerand flexibility—it also means keeping IT efficient by minimizing costs. Towardthat end, solutions designed for virtual-ization and consolidation deliver quan-tifiable benefits. When the total numberof servers falls, energy costs and gen-erated heat can also decrease. IBMdelivers many powerful featuresacross many product lines, all designedto enable and drive energy manage-ment strategies. Centrinet, a UK organization that providesIT management services, had a uniqueidea: build a data center, known asSmartbunker, designed to run efficientlyon entirely renewable energy and to offerthis as a hosting service to clients. The solution proved to beIBMBladeCenter, which integrates servers, networks, storage and applica-tions in 1-inch deep blades that sit in arack like a bookshelf. Right from our first dealings with IBM,we were very impressed,† said KellySmith, Managing Director atSmartbunker. â€Å"We weren’t an IBMcus-tomer prior to this, but we were aware ofits green credentials, and that undoubt-edly helped. The products put forward byother companies couldn’t match IBM’s interms of performance, energy efficiencyor reliability. The so lution we chose willalso help us to expand the business veryquickly, without any concerns about over-loading our IT infrastructure. †Page 4 ] IBMBladeCenter, for instance, allows ITto get the most processing power inthe smallest physical footprint, evenwhen compared to rack units. TheIBMBladeCenter E holds 14 servers in7U of rack space—a 50% improvementin comparison to seven 1U servers. Yet,that same BladeCenter E, based onIBMengineering test data, will requireas much as 35% less power. 6Thisreduction comes thanks to many spe-cial enhancements, such as low-powerprocessor options, energy-efficientpower supplies, IBMCalibratedVectored Coolingâ„ ¢ to maximize airflow,solid-state drives, a shared-coolingdesign, and IBMSystems DirectorActive Energy Managerâ„ ¢, an IBMdiag-nostic and management tool. Furthermore, a strong competitiveadvantage is apparent whenIBMBladeCenter solutions are com-pared to those from other vendors. According to the Edison Group, theIBMBladeCenter H required almost10% less energy than an HP BladeSystem c7000 using comparable con-figurations. 7The IBMadvantage is evenclearer when we take a holisticapproach to energy efficiency and uti-lize IBMBladeCenter unique innova-tions like the energy efficientIBMBladeCenter E chassis, Solid StateDrives and IBMSystems Director ActiveEnergy Manager along with Intel low voltage processors. With these innova-tions in place, we can reduce theamount of energy required by an addi-tional 25%. Among x86-based servers, theIBMSystemx offerings deliver excep-tional energy efficiency—stemming inpart from their DDR2 memory asopposed to FB-DIMMs. Multipliedacross many consolidations, this designoptimization alone can lead to substan-tial returns, as it did for StaybridgeSuites in Florida, which reduced energy costs 35% simply by migratingall lower-end servers to a single System x3950. 9For customers running IBMPowerSystems, PowerVM and POWER6â„ ¢EnergyScale technology similarly helpsdrive down energy consumption, espe-cially by comparison to other vendors. In fact, when compared to a 64-coreHP PA-RISC Superdrome, an eight-core IBMSystemp 550 can reduceelectric consumption by up to 91%,while also achieving 16% more data-base transaction performance. 10And forcustomers migrating to IBMPowerSystems solutions from multiple com-peting servers, the energy managementargument will be even stronger. Up to180 Sun SunFire V490 servers, forinstance, can be consolidated onto asingle rack of the IBMBladeCenterJS22, leading to a staggering energyreduction of 92%. 1 Rabobank Group, a full-range financial services provider founded on cooperativeprinciples and a global leader in sustainability-oriented banking, found thatas new internal systems were added andexternal services launched, the number ofservers in the data center grew. To consolidate, Rabobank worked withIBMGlobal Services to design a newarchitecture based around theIBMSystempâ„ ¢ platform runningIBMAIX ®5Lâ„ ¢ V5. 3. The architecturereplaces the previous â€Å"one applicationper ph ysical server† model with virtualizedservers running on standard physicalâ€Å"building-blocks†: IBMSystemp5â„ ¢570and 560Q servers, each with16IBMPOWER5+â„ ¢ processors. Page 5 Reduce server and storage costs and sim-plify administration Storage represents another excellentopportunity to realize improved busi-ness value through IBMsolutions. Viatiered storage architecture, organiza-tions can assign higher performance tothe services that need it the most, andreduce costs by mapping lower-performance storage to lower-priorityservices. Nevertheless, many organiza-tions have yet to move to tiered storagearchitectures. IBM can help. IBMstorage solutionsare designed to ensure that perform-ance and features are closely alignedwith dynamic business requirements. One key solution in this category: theIBMSAN Volume Controllerâ„ ¢ (SVC),which provides a single logical point ofmanagement across all tiers. SVC alsoenables storage to be treated as a logi-cal resource that can be allocated andretrieved in proportion to changingneeds—this helps IT achieve superiorstorage utilization, making the most ofavailable storage space rather thanrequiring the purchase of more storagedevices. Besides, SVC is the industry’shighest performing, most mature stor-age virtualization solution, unmatchedby any competitive offering. How suc-cessful has it been in today’s ultra-competitive storage market? Since itsintroduction to the market in 2003,IBMhas shipped over 12,000 SVCengines running in more than 4,000 SVC systems. 12 Server costs, similarly, can be bettercontrolled and reduced throughIBMsolutions. Consider thatIBMBladeCenter delivers 25% betterdensity compared to competing blade-based offerings,13while also doublingtypical rack unit density. This physicalconsolidation of computational powermeans that, just as with storage, IT isempowered to accomplish more withfewer resources—a clear example ofreduced costs and simplified administration. IBM System x3850 M2 and x3950 M2deliver potent features and functionality,pairing industry-leading performancewith the industry’s lowest total cost ofownership by product class. This is dueto the processor-rich architecture,which boasts 16 sockets—twice that ofother offerings. Twice the power trans-lates into half the total number ofrequired servers for any given IT appli-cation; this, in turn, can lead to a sub-stantial reduction in overall costs. IBM enterprise servers are designedwith high-efficiency power supplies andCPU/memory regulators that eliver15% less power than the HP ProLiantDL580 G5 server leading to savings of42% less per server per year. 14And the cost reduction story is evenmore impressive in the case of IBM’sPower Systems line. According to a2007 whitepaper from the InternationalTechnology Group (ITG), the averagesavings for organizations that consoli-date servers on these IBM hosts is aremarkable 65-70%. An ITG study saysthat IBMdelivers the lo west overall TCOacross the entire UNIX systems space. 5 AISO. Net, the world’s first and only 100%solar-powered web hosting company,serves more than 12,000 customersworldwide and is committed to being thebest, most reliable eco-friendly hostingcompany in the world. This commitmentresulted in Live Earth producers selectingAISO. net to host the liveearth. org Website. To host the site, AISO. Net customdesigned a dedicated, reliable solutionusing energy efficient IBMBladeCenterservers with Second-Generation AMDOpteronâ„ ¢ processors. We can run theLive Earth Web site on IBMBladeCenterand get great performance without hav-ing the power draw we would have hadwith rack servers, † said Phil Nail, tech-nology manager for AISO. Net, in explain-ing their platform selection. Page 6 Drive business value with leading perform-ance and price/performance As companies strive to compete moreeffectively, deploying and orchestratingvarying IT services dynamically to corre-spond with cha nging business goals,strategies and performance is a keyingredient to success. And when com-pared to solutions from other vendors,IBMsystems—both modular andPOWER-based—deliver exceptionalperformance, performance/watt, andprice/performance. How exceptional? In the case of theIBMSystemx3850 M2 enterpriseserver, a virtualization performancecomparison conducted by PrincipledTechnologies showed a 27% superiorityin performance per watt when com-pared to the HP DL580G5. 16What’smore, the same system showed anoverall TPC-C performance superiorityof 27%. And for the maximum inSystemx-based performance, considerthe Systemx3950 M2, which offers thehighest x86 TPC-C benchmark everrecorded as of February 2008, nearly62% more transactions per minute thanthe Unisys ® ES7000/one EnterpriseServer’s 8-processor result of 520,467 tpmC and 12% more thantheir 16-processor result of 749,839 tpmC. 2. 17 Blistering throughput is also a keyaspect of IBMPower Systems solu-tions. Compared to mid-range competi-tors such as the Intel ® Itanium ®, IBM’sPOWER6-based processors have beenshown to offer two to three times theoverall performance across a wide vari-ety of benchmarks targeting differentworkloads and classes of computa-tional performance. 18IBM also offers tremendous perform-ance per watt in the case of the new,watercooled POWER 575 supercom-puter. This model, a computational wizard driven by 224 POWER6 proces-sors, incorporates innovative, water-chilled copper plates over eachmicroprocessor to deliver high perform-ance while minimizing generated heat. The outcome? More than five times theperformance and three times theenergy efficiency of the POWER5+â„ ¢-based model 57519—literally eight trillionoperations in a heartbeat’s time. High-end IBMstorage systems alsooffer extremely efficient design for highavailability without compromised per-formance. The DS4000, for instance, aRAID6 system, delivers exceptionalthroughput—within 3% of an equivalentRAID5 configuration despite the addedsystem activity. 20 Transplace, a leading logistics provider,was looking for a way to deploy softwareas a service, maintain 24/7 applicationavailability, launch new services rapidly,and minimize IT operations costs. Achieving these goals meant new sys-tems, and Transplace turned to IBM. The eventual solution? IBMPower 570servers, for exceptional computationalpower via fewer processors—translatinginto improved scalability and substantialoverall cost reductions in software licensing. â€Å"We discovered that servers usingIBMPOWER6 processors at the data-base layer would let us deploy fewer but faster processors,† said VincentBiddlecombe, CTO of Transplace. â€Å"Thislet us further lower our Oracle licensingcosts. †Page 7 Summary Maximizing IT business value meansgetting as much performance as possi-ble from IT assets while simultaneouslymanaging costs—both now and in thefuture. This is particularly true in thedomain of energy efficiency; as datacenters have grown more complex,their energy consumption has scaledup rapidly to the point where it nowcomprises the fastest-growing elementof overall data center costs. Fortunately, IBMoffers a broad array ofleading server and storage solutionsdesigned to fulfill operational perform-ance goals while also empoweringenergy management strategies. Asenergy costs rise, revenue that wouldhave been required for them caninstead be directed toward strategicnew products and services—a majorwin for the organization. Cost reductions are only half the story;when organizations pursue businessgoals they must also consider thepotential environmental impact of theiroperations. By decreasing the energyrequired by data centers, organizationsalso help eliminate environmentallyharmful carbon emissions, thus directlybenefiting both local communities andthe global ecosystem. Such responsible environmental stew-ardship on the part of the organizationcan also translate into improved publicperception by clients and customers; asenergy management is optimized andcarbon emissions diminished, the orga-nization’s brand is strengthened. By moving up to IBM, today’s organiza-tions can achieve a comprehensiveresponse to the many growing chal-lenges facing IT today—scaling upenergy efficiency and agility and scalingdown costs, carbon emissions, andmanagement complexities, to render ITa powerful yet cost-effective vehicle inthe pursuit of changing business goals. For more information To learn more about energy efficiency indata centers, please contact yourIBMmarketing representative orIBMBusiness Partner, or visit the fol-lowing Web site: ibm. com/itsolutions/energy-efficiency/ Companies around the world have savedmoney by migrating from competitiveUNIX servers and consolidating onIBMPower Systems. For instance,Energen, one of the top 20independentoil and gas exploration and productioncompanies in the United States, was ableto save more than $500,000annually byconsolidating 20Sun servers onto twoIBMPower570 servers.