Bmia5103 Investment Analysis Capital Budgeting Assessment Answer

 Leading indicator: the leading indicator is used to signal the entire events. It is used to speculate and anticipate the future economic trends in the stock market. The stock prices, money supply, m2 are few examples of leading indicators. Bond yields are thought to be a good leading indicator of the stock market because bond traders anticipate and speculate trends in the economy (even though they aren't always right). New housing starts, money supply, M2, and stock prices fall under leading indicators.

Lagging indicators: The lagging indicators are used for following a particular event. The purpose of this indicator is to to confirm the technique or pattern of the event. It can be said that the rate of unemployment is a popularly used lagging indicators. The consumer price index that is also a lagging indicator that helps in the measurement of the rate of inflation. The importance of a lagging indicator is its ability to confirm that a pattern is occurring. Unemployment is one of the most popular lagging indicators. If the unemployment rate is rising, it indicates that the economy has been doing poorly. Another example of a lagging indicator is the Consumer Price Index (CPI) which measures changes in the inflation rate.

Coincident Indicators: The coincident indicator as the name suggests is used approximately at the time as the events or conditions take pace. This indicators rather than predicting the future events they change at the same time as the stock prices changes. The instances of the coincident indicators refer to the personal income and GDP that are popularly used as the tool to analyze the economic changes and conditions.  The gross domestic product (GDP) of an economy is also a coincident indicator.

Economic indicators are a useful but imperfect tool for seeing there the economy has been, where it is, and where it’s going. Economic indicators are subject to interpretation, and conflicting data from one release to the next is common. It is therefore best to look at overall trends in data, as well as assessing all three economic indicator classes: leading, lagging and coincident. By following a couple of indicators in each class, investors are more likely to be able to get a read of overall conditions.The stock market itself is one of the most powerful leading indicators we have, which means applying economic data to try to predict it is often fruitless; instead, use the stock market to predict where the economic cycle is headed.

The leading indicators are a good tool for the anticipation of the economic conditions, the managers of investment must be made aware of the information and in possible effects, and the investment decisions might reflect the trends that are projected. However, the indicators are not fallible; they help in the generation of false signals. if there is downfall in the leading indicator it might be lead to a fall in the growth rather than experiencing a full blown recession if the downturn is shallow or brief. The type of indicator that is more consistent in case of the stock prices is represented by the S&P 500 stock exchange composite index. Therefore, the indicators that are being deal with are roughly coincident with the most significant stock determinant returns and changes in the price. Therefore, it can be sad that the leading indictor is useful in the achievement of above average investment results. One of the most significant leading indicators is the stock market itself, gauged by an index such as the S&P 500. It will begin to rise before economic conditions seems favorable, and it will be begin to decline before economic conditions seem to warrant it.

The rate of interest is the most crucial aspect that helps in taking the various investments. The interest influence the cost of borrowing , the savings returns and the rate of return. They also help in providing insight to the future financial and economic market activity.The interest rate forecasts may be important in reaching investment conclusions since they are the debt instrument that are issued by the government and various institutions who need to raise capital. There are various kinds of interest that helps in the the determinations of the amount of investment like the Fed discount rate , fed fund rates, Prime rates, Treasury bills. In the structure of loan whatsoever, the interest rate refers to the percentage difference between money paid back and money got earlier, keeping into account the amount of time that has been elapsed. Lower Interest rates encourage additional investment spending, which gives the economy a boost in times of slow economic growth. The Federal Reserve Board is in charge of setting interest rates for the United States through the use of monetary policy. The Fed adjusts interest rates to affect demand for goods and services.Interest rate fluctuations can have a large effect on the stock market, inflation and the economy as a whole. Lowering interest rates is the Fed's most powerful tool to increase investment spending in the U.S. and to attempt to steer the country clear of recessions.

In case of a Fundamental research analyst of an airline, industry the relevance of time series has no bounds. They help in the dynamic decisions making and management decisions where time and money are related. The time series consist of a sequence of well defined data that are measured in specific time intervals that help in understanding the particular trend. Thus, enhancing in the process of decision-making.In business, a time series tracks the movement of the chosen data points over a specified period of time, with data points recorded at regular intervals. Some examples of time series data are daily temperature, hourly web traffic or total daily plane arrivals. Time series analysis allows us to extract meaningful statistics and other characteristics from time series data. A type of time series analysis is forecasting, which predicts future values based on previously observed values. Another type is impact analysis, which identifies the potential consequences of a change. Similarly, the economic indicators and economic data in case of airline industry for the purpose of company research would help in understanding the economic conditions, helping forecasting the amount of return on investment. Economic data or economic statistics are data describing an actual economy, past or present. These are typically found in time-series form, that is, covering more than one time period or in cross-sectional data in one time period. Data may also be collected from surveys of for example individuals and firms or aggregated to sectors and industries of a single economy or for the international economy. A collection of such data in table form comprises a data set.

Answer to Question 2

A product processes through a number of stages, such as from introduction to growth, maturity, and decline. This sequence of stages is called Product Life Cycle (PLC). The PLC influences the marketing strategy and marketing mix of an organization.

In case if the management of Kodak, the industry life cycle refers to the various stages where the business operates, prospects and progresses within an industry. The industry life cycle consists of five stages that consist of start-up, growth, shakeout, maturity and decline.

 In case of Kodak management, the start up stage is the stage where the customer demand is limited since the new product is not familiar in the market. The next stage is followed by the growth stage where the product of Kodak would attract attention from a bigger market segment. There is a rise in the teen dos saes and profit.  The following stage is shakeout stage that refers to the consolidation of the industry. In this  stage merger and acquisition takes place with other companies. The next stage is the maturity stage that is point where the company would reach a saturation point. However, in this stage the business would they to protect themselves with various strategies and attempts. The final stage is the decline stage where the company declines due to several factors. No strategy can help in overcoming the situation.

It is possible to provide examples of various products to illustrate the different stages of the product life cycle more clearly. Here is the example of watching recorded television and the various stages of each method:

1. Introduction – 3D TVs
2. Growth  – Blueray discs/DVR
3. Maturity  – DVD
4. Decline  – Video cassette

The idea of the product life cycle has been around for some time, and it is an important principle manufacturers need to understand in order to make a profit and stay in business.

However, the key to successful manufacturing is not just understanding this life cycle, but also proactively managing products throughout their lifetime, applying the appropriate resources and sales and marketing strategies, depending on what stage products are at in the cycle.

In case of photography the five factors that determine an industry’s intensity of competition are as follows:

• Industry concentration:  This deal with the various competitors that the industry consists of.Clearly, a high number of competitors of equal size will lead to more intense rivalry. There will be less rivalry when a clear leader exists. Therefore, the degree of concentration in the industry must be assessed as one of the primary factors influencing intensity of competition in the industry.
• Market growth rate: It is the rate of growth that can be predicted considering all the internal and external factors of the industry.If market growth is high, competition will be less intense.
• Cost structure: it is the structure of cost that are fixed and variable in the photography industry.This structure belongs to the important factors influencing intensity of competition because high fixed costs encourage price cutting to fill capacity. Consequently, competition will be more fierce.
• Degree of differentiation: it is the intensity of competition that encourages rivaly
• Cost switching: This factors that would let the supplier switch the product for another for considering the cost of the competitors.When customers switch their supplier, switching costs arise, in whatever form. It may even be that these costs are not even tangible – customers simply do not like to change. When switching costs are high because the product is specialized, the customer has invested a lot of resources in learning how to use the product or has made tailor-made investments.

It can be analysed from the photography industry that the profitability of the industry would show an upward trend in the short run since the trend of photography business is increasing and is in high demand. However in the long run it can be predicted that the profitability may fall due to increase in competition and rivalry in the industry.

In case there is a amount of RM 1 million, the investment in Kodak company would not be a good idea considering a long run, since the amount of competition in this sectors is rising that may lead to decline.

Guidelines for better decision-making:

Using the following structured way to analyse the better  decision making:

Establish the facts behind the prediction
In a world saturated with information, it is remarkable that decisions are often not made on a factual basis. 

Consider the motivations of the source

If a prediction is made by a news source that is ideologically required to adjust its coverage, either adopting a positive upbeat tone or leaning towards bearish negativity, this may compromise that prediction.

Consider the opposite course of action

When professional portfolio managers construct a portfolio, they normally try to combine investments that have different risks and upsides, so that if one performs badly, the other may perform well, or will at least not be impacted. In case the future is unknowable and beyond our comprehension, but we do have the power to choose how we respond to it in the decisions we make.

References

Capital Budgeting Valuation (Wiley, 2015)

Environmental life cycle analysis. CRC Press(Ciambrone, 2018). .

 Tax rates and corporate decision-making. The Review of Financial Studies, 30(9), 3128-3175(Graham,., Hanlon, Shevlin, & Shroff, ,2017).

International Journal of Science and Research (IJSR), 6(7), pp.32-38(Investment Analysis of Photovoltaic Roof Project Based on Real Option. 2017) 

Investment Analysis (Kellogg Farm Management Unit, Lincoln College, 2016)

Markow, Michael J, Engineering Economic Analysis Practices For Highway Investment(Transportation Research Board, 2016)

Product lifecycle management. In Product Lifecycle Management (Volume 1) (pp. 1-29). Springer, Cham. (Stark, 2015).

Barriers, drivers and decision-making process for industrial energy efficiency: A broad study among manufacturing small and medium-sized enterprises. Applied Energy, 162, 1537-1551 (Trianni, Cagno,  & Farné, 2016).