The Hong Kong Polytechnic University Finance Essay - Free Essay Example

The objective of this professional report is to discuss about engineering economic decision of a high technology firm, Google Inc. It is focused on the following two aspects. One is the role of engineer in making business decision. Another one is the tools and techniques to engineers for making capital investment decision. Background of Google Inc. Google Inc. is an international corporation. It provides a wide variety of internet-related products, such as internet search engine, software and cloud computing etc. It grows rapidly due to the chain of products, acquisitions and partnerships besides its core search engine business. It develops much internet-related software such as e-mail, online office suite and social networking. Every firm aims at making profit. To maximize the profit of a company, an appropriate economic decision plays an important role. Google has many products, like google map, Gmail, Picasa, Android etc. How does Google make economic decision to make profit? Taking Android as an example, it can be illustrated the way that Google has achieved splendid business outcomes. Engineering Economic Decision of Google Inc. Android From the ensuing paragraphs, we can see how the Android system of Google Inc. makes profit by the revenues from advertisement and transaction fee from Play Store. Android is an operating system using Linux which uses an open source as base. Nowadays, it is widely used in smart phone and tablet. The Android operating system of Google becomes most popular. It occupies about sixty percent of smart phone operating system. It beats Apple, Nokia and Windows. Although the Android system is an open source project, it still makes profit. The majority of benefits come from advertising. Service providers are willing to place advertisements in Google Inc. if more people will visit its website. Page 1 Google makes profit by driving the users of smart phone to its Google search engine. The revenue earned from advertisement was used on the search engine. Hence, if there are more people using the search engine of Google.com, there will be great revenue earned by the company. It can be said that Google search is set as default in almost every Android device. From a research, it is revealed that twenty searches are conducted by every Android user in a month. Every hit on Google search engine by a user is counted as an impression. The revenue drawn on this item is $20 for every 1000 impression. From the research of Business Insider, Google is the dominator occupying about 90% of the $487.3 million mobile search market. Android also makes money from the Google Play Store. Thirty percent transaction fee for each app sold in its Play Store is taken by Google. The remaining seventy percent goes into the application developer. Also, Google recently levied a subscription charge on 10% revenues from publishers within the Android Market. Role of Engineers in Making Business Decisions To understand how Google Inc. can make profit from a free system Android, we have to learn about the role of engineers in making business decisions. Importance of Decision Making Decision making is an important process which affects the well-being of an organization. It is acknowledged that decision making can be enhanced by adopting a framework approach, i.e. decision engineering. Decision engineering is a structure that streamlines a series of best practices for organizational decision. It aims to tackle the problem of a decision making complexity ceiling. The special feature of complexity ceiling is a mismatch between organizational decision making practices and the complexity of circumstances in which those decisions must be made. In that case, decision engineering is a practical application of complex systems in which the organizations can navigate them. Page 2 It is also a structure that enables non-expert decision makers to have decision making by using advanced analytical skills and incorporating inductive reasoning and machine learning techniques to solve the problems specified in Black Swan theory. Engineers Role It seems that engineers are not related to making business decision. However, engineers play an important role in making economic decision making. In the case of engineering projects and systems, engineers are in the first priority to make economic decision making. Engineers are the most suitable because engineers have good knowledge of all the technicalities of machinery and production. Hence, they have good judgment on the useful lives of an asset. In addition, they also have the technical know-how to evaluate the quantity of units which a proposed plant will produce when it is in operation. When engineers deal with a business project, they need to create and design what types of engineering projects to do. After that, engineers have to analyze different problems. They have to evaluate which production methods can minimize the cost of production. Engineering safety and environmental influence are also needed to consider and study. Therefore, a market assessment will be conduct ed in the analyzing stage. For engineers to do business, the most essential factor has to be considered is the revenue and profit. The expected profit is estimated and the timing of cash flows is evaluated. Meanwhile, engineers also require thinking of the contingency like considering if there is any degree of financial and monetary risk and hazard. Finally, the influence on financial statements, market value of the firm and the stock price are evaluated by engineers. Processes of Making Engineering Economic Decisions To make engineering economic decisions of a high-technology firm, several processes have to be followed. The decision problem has to be recognized. The objectives and targets must be defined clearly. Researches on relevant topics must be conducted and the relevant information is collected. Among different sets of feasible alternatives, compare and identify which one is the best and choose to utilize. Page 3 Avoid making an incorrect economic decision, engineers have to foresee what will happen in the future when considering determination. For example, the required amount of investment is estimated, the quantity demanded of a product is predicted, the life of the product is estimated, a profitable manufacturing cost and selling price are also estimated as well. Engineering economic decision can assure improvements in the quality of decision made, the technique and skill to produce them in more prompt action, the ability to utilize the organizational resources in an effectiv e way and minimize the risk associated with decisions. Also, a designed engineering decision can be reused and modified to become a new idea. Major Factors to Understand Engineering Economic Decisions From the point of views of engineers, the chief and major factors to understand engineering economic decisions is the evaluation and analysis of costs and profit associated with making capital investment. There are five main types of strategic engineering economic decisions. They are (i) improvement of service or quality, (ii) new product or product expansion, (iii) equipment or process selection, (iv) reduction of cost and (v) replacement of equipment. Engineering economic decisions are affected by the elements of time and uncertainty. Improvement of Service or Quality If the service or quality improvements are concerned, the engineers choices are the most obvious matters that can deliver the service better such that the perceptions of customers are increased. The decision determining the service quality can be revealed and reflected by four primary aspects. They are design-based, culture-based, variation-based and failure-based improvement strategies. The service quality can be improved by addressing quality via design. There are three approaches using design-base to improve quality. They are: customer perceptions, customer needs and direct psychological manipulation of satisfaction through design. Page 4 New Product or Product Expansion It is common for a firm to develop new products or carry out product expansion. It is because this will increase the revenues of the company. If the number of output products is raised, investments in this class can expand the profit of the company. Equipment or Process Selection This category of engineering decision problems arises from selecting the best course of action among several which meet the requisites of a project. Reduction of Cost In order to maximize the revenue of a project, one of the ways is to minimize the cost of production. This attempt can decrease the operational cost of a firm. Replacement of Equipment This decision of investment requires the consideration of the cost involved in replacing worn-out or outmoded equipment. Tools and Techniques to Engineers for Making Capital Investment Decisions Developing a new operating system like Android, Goggle Inc. has to make capital investment decisions. The capital investment decision is related to accountancy and financial aspects. Combined business factors create that business investment becomes the essential financial management decision. Investment decisions of a firm are very important. It is because it can affect all departments of a firm vitally, like the production, marketing and logistics departments etc. Therefore, all executive staff are very concerned about the ways of the capital investment decisions are made. Meanwhile, they are aware of the importance of interaction in the process. Page 5 Evaluation of Capital Investment The capital investment decisions are closely related to the investment analysis tools and techniques. There are four phase approach including planning, project or capital evaluation, status reporting and post completion reviews which can be characterized to enhance investment program. Capital expenditure is the application of investment. Investments in plants and equipment are included in the capital expenditures. These expenditures will bring about the reduction of production cost, reduction of working capital investment, fast production, production capacity expanding, and enhancement of the quality of product. Utilizing the incremental cash flows, the investment results can be measured. Applying investment analysis to the business investments are considered as expenses. One of the examples is investment in an advertising campaign or research and development. The development of operating system Android by Google Inc. has illustrated an example of investment in research and development. To promote new products, marketing expenditure which includes promotions and advertising and investment in equipment is necessary. Before a new product is developed, an investment analysis is conducted to estimate the projected sales, revenue and the flows of cash. Hence, the economic viability of the new product is assessed and determined. Four-Phase Approach To invest a business, there is no guarantee of making profits. The chance of success can be increased if the four-phase approach is applied. The four phases are planning, project or capital evaluation, status reporting and post completion reviews. Certainly, successful investment can be achieved if the four phases can be implemented successfully. Page 6 Phase 1: Planning Strategic financial planning is regarded as the planning phase. Capital expenditure is estimated in the strategic financial plan. It can be categorized into cost savings, expansion of capacity, development of new products and miscellaneous. Phase 2: Capital Evaluation and Authorization A powerful investment evaluation and authorization can help an organization in communicating among executives of a firm and giving the correct business direction. Investment analysis affects many areas of a firm. There are many elements of the capital investment decision of a new product. They consist of finance, research and development, human resources, corporate communications, legal, production marketing, logistics and sales etc. In order to ease the process of investment analysis, a capital authorization request involves various supporting parts and or schedules. They are: summary cover page amounts, assumptions and net present-value analysis of decision case cash flow analysis of scenario components of investment potential vendor cost of basis quarterly expenditure budget Phase 3: Capital status reporting Status reporting can monitor the progress of the project investment. Utilizing this report, the initial investment can be compared with the authorized report by the project manager. Page 7 Phase 4: Post completion review Post completion review should be carried out regularly after the project has been completed. It may be yearly, bi-annually, quarterly or whenever. It compares economic evaluation indicators and the original approved cash flows of the project with the updated operating performance. Besides considering the four phases of the capital investment process, each company has to evaluate investment decisions by using capital investment evaluation techniques: payback period (PBP), net present value (NPV) internal rate of return (IRR) terminal rate of return (TRR) modified internal rate of return (MIRR) discounted payback period (DPBP) profitability index (PI). Among these capital investment techniques, the most commonly used procedures for ranking investment proposals are payback, net present value, internal rate of return and terminal rate of return. The definition of payback is the number of years needed to return the original investment. This method is freque ntly used, but there are significant conceptual defects as it ignores the fact that (1) some receipts are received beyond the payback period and (2) the money is less valuable in the future when comparing with today due to inflation. The definition of net present value (NPV) is the different between the present value of future returns, discounted at the cost of capital and the investment cost. The NPV method overcomes the conceptual weakness mentioned above. The definition of the internal rate of return (IRR) is the interest rate that equates the present value of future returns to the investment expense. Page 8 Terminal rate of return is defined as the interest rate that is equivalent to investment cost and the gathered future worth of the intermediate cash flows which is planned to be reinvested at a suitable risk-adjusted capital cost. Capital Investment Decisions The capital investment decision is significant to a firm. It is because the growth and health of a firm is improved. Thus, the value of shareholder is enhanced. The capital investment decision is the financial analysis which aims at maximizing the worth of a firm. When there are several capital budgeting standards, we can follow some techniques to make a decision. All of the cash flows are considered appropriately. The opportunity cost of capital determined by the cash flows at the suitable market is discounted. The project with maximum wealth of shareholders is chosen from a group of mutually exclusive projects. The value additivity principle states that each project should be considered independently from the project managers. Conclusion In order to get good business results, investment decisions and economic decisions are very significant. Google Inc. can become a well-known high technology firm is due to the strategies mentioned before. It is expected that the business of Google will be larger and larger in the future. Page 9