For the fiscal year 2011, Dell has planned to open up company owned stores and service centre 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 provision of services locally and the rest being threatened by HP/Compaq. Dell plans to start with opening up 3 stores in that country. Each store would cost $300,000 for acquisition of commercial land plus $100,000 to make it running along with 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.
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%.
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 under estimation 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 ...
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