Financial appraisal

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  • Publicado : 27 de febrero de 2011
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ABSTRACT
Among the numerous decisions that modern companies make is the decision to expand already existing products to new markets or make new products for the already existing market. Bothdecisions carry some its merits and demerits. This report seeks to identify these merits and demerits regarding the return on investments on both strategies and the risk involved in them as well.Empirical studies were done using tools like NPV, IRR, PI and ARR to ascertain which of the two strategies is more financially feasible. The results calculated from these analytical tools arethen discussed and recommendations are made.
INTRODUCTION
Companies are always looking at ways to gain competitive advantage. This can be done by the development of new products or marketextension on existing products. New products development or market extension on existing products offer various advantages and disadvantages that can assist firms to grow and also gain competitiveadvantage.
Measuring the return on investment for either strategy is very important. The risk involved also is very important. These two can help managers make very valuable decisions as towhat to do in terms of market expansion or new product development. If for example the estimated return on equity on one strategy is very high as compared to the other then more emphasis must bepaid to that strategy.
Another factor that management and investors alike look at in their quest of decision making is the riskiness of a strategy. Investors would be wary of a high rate ofreturn with a wide range or variance of returns. This will be deemed risky. Investors with low risk tolerance may favour a less risky but lower rate of return investment.
This reportcompares the results of both new product development in a known market and market extension for already existing products using the return on equity to determine which approach is more beneficial.
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