Dells Investment Decision on Expansion - Essay Example

Dell has planned to open up company-owned stores and service centers in some of the developing Asian countries to target the maturing market and get the maximum chunk of the market share.
Currently, the country under observation is one where Dell has been observing a significant share being taken away by Acer due to the provision of services locally and the rest being threatened by HP/Compaq. Dell plans to start by opening up 3 stores in that country. Each store would cost $300,000 for the acquisition of commercial land plus $100,000 to make it run along with an inventory of laptops, desktops, and other accessories (working capital). Thus the total initial investment required is around $400,000 for each of the 3 stores/service centers.

Total Initial Outlay = 400,000 + 400,000 + 400,000 = $1,200,000
It is expected that Revenues will increase by $900,000 each year if the company implements the new project. Operating Expenses will increase by $600,000 in the following years. We assume that the tax bracket in the country in which Dell will be operating is 35%.
Incremental After Tax Cash Flows = (900,000 – 600,000) x (1 – 0.35) = $195,000
There are several issues involved in projecting cash flows, revenues, and expenses and above all getting the project through the management team and getting the majority shareholders to approve a project when competition is fierce and profit margins are shrinking. The cost estimation of the initial outlay is estimated by the product/business development department whereas revenue forecasting is the responsibility of the sales/marketing department. Operating costs are estimated by the various officers like the finance manager, accountant, and tax experts of the company. There can be several issues in projecting the cash flows. A major concern is the over or underestimation due to few biases or lack of experience about such projects. Secondly, the errors can be due to inadequate capital rationing, not considering the salvage values, and ignoring sometimes the intangible and long-term benefits of such investments.
Another job of the project manager would be to coordinate the efforts of all concerned and avoid any conflicts which may arise due to different priorities. Since this investment doesn’t require any enormous outlay, the project can be funded partly by retained earnings along with debt financing by a bank that has a strong presence in that developing Asian country. Estimating the cost of financing can also be a major concern for the company since they need to account for exchange rate risk and inflation in the foreign country.