Assuming that the management of NMC wish to maximize expected net returns, determine the optimal policy which they should pursue.

The Northern Manufacturing Company (NMC) is considering extending its operations by opening a manufacturing plant in an overseas country. Two countries are being considered, Slohemia and Tundrastan, but resource constraints mean that only one of these countries can be selected. The decision will largely be based on the level of sales of NMC’s products which can be achieved over the next 5 years in the host country. For simplicity, these sales have been categorized as either high or low. If Slohemia is selected there is estimated to be a 0.3 probability that a new government will come into power within the next 5 years and nationalize all foreign investments. This would lead to losses with an estimated present value of $10 million being incurred by NMC. If nationalization does not take place it is thought that there is a 0.7 probability of high sales being achieved. These would generate net returns having an estimated present value of $95 million. Low sales would lead to net returns with a present value of $15 million. If Tundrastan is selected the chances of achieving high sales will depend on whether a local company sets up in competition with NMC. It is estimated that there is an 80% chance of this happening. However, if there is no competition there is thought to be a 0.9 probability of high sales occurring. These would generate net returns with an estimated present value of $90 million. Low sales would lead to net returns with a present value of $10 million. If NMC does find itself facing competition in Tundrastan, it would first have to decide whether to attempt to buy out the competitor. This would be expensive. Indeed it is estimated that it would reduce net returns, by $20 million, irrespective of whether it was successful. The chances of a success are estimated to be only 75%, but a successful buyout would lead to market conditions identical to those involving no competition. If a decision was made not to attempt the buyout, or if the buyout failed, NMC would then have to decide whether to lower its prices to undercut the competitor. This would reduce net returns by around $30 million but its effect would be to increase the chances of high sales from 0.5 to 0.8.

(a) Assuming that the management of NMC wish to maximize expected net returns, determine the optimal policy which they should pursue.

(b) Discuss the limitations of the analysis which you applied in part (a).

(c) The estimate that there is a 30% chance that a new government in Slohemia will come to power and nationalize all foreign assets has been disputed by a number of NMC’s managers. Many think that the probability has been overestimated. Perform a sensitivity analysis on this estimate and interpret your result.

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Strategic Management Project

Assignment Content Review the Strategic Management Project Background and your strategic management research journal entries from Weeks 1–4. Create a 10-slide presentation for Caterpillar Inc. leadership in which you summarize your key findings, propose….

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Case Problem Investment Strategy J. D. Williams, Inc. is an investment advisory firm that manages more than $120 million in funds for its numerous clients. The company uses an asset allocation model that recommends the portion of each client’s portfolio to be invested in a growth stock fund, an income fund and a money market fund. To maintain diversity in each client’s portfolio, the firm places limits on the percentage of each portfolio that may be invested in each of the three funds. General guidelines indicate that the amount invested in the growth fund must be between 20% to 40% of the total portfolio value. Similar percentages for the other two funds stipulate that between 20% to 50% of the total portfolio must be in the income fund and at least 30% of the total portfolio value must be in the money market fund.   In addition, the company attempts to assess the risk tolerance of each client and adjust the portfolio to meet the needs of the individual investor. For example, Williams just contracted with a new client who has $800,000 to invest. Based on an evaluation of the client’s risk tolerance, Williams assigned a maximum risk index of 0.05 for the client. The firm’s risk indicators show the risk of the growth fund at 0.10, the income fund at 0.07 and the money market fund at 0.01. An overall portfolio risk index is computed as a weighted average of the risk rating for the three funds where the weights are the fraction of the client’s portfolio invested in each of the funds. Additionally, William’s is currently forecasting annual yields of 18% for the growth fund, 12.5% for the income fund and 7.5% fir the money market fund. Based on the information provided, how should the new client be advised to allocate $800,000 among the growth, income and money market funds? Develop a linear programming model that will provide the maximum yield for the portfolio. Use your model to develop a managerial report.   Managerial Report: a.Recommend how much of the $800,000 should be invested in each of the three funds. What is the annual yield you anticipate for the investment recommendation change? b.Assume that the client’s risk index could be increased to 0.055. How much would the yield increase and how would the investment recommendation change? c.Refer again to the original situation where the client’s risk index was assessed to be 0.05. How would your investment recommendation change if the annual yield for the growth fund were revised downward to 16% or even to 14%? d.Assume that the client expressed some concern about having too much money in the growth fund. How would the original recommendation change if the amount invested in the growth fund is not allowed to exceed the amount invested in the income fund? e.The asset allocation model you developed may be useful in modifying the portfolios for all the firm’s clients whenever the anticipated yields for the three funds are periodically revised. What is your recommendation as to whether use of this model is possible?  

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