Accounting Project

IBM Project Evaluation
Student Name
Institution Affiliation
IBM Project Evaluation
Introduction
Due to the ever-changing nature of the business environment, organizations invent and introduce new products into the market. Introduction of new products through innovations will enable the organization to be flexible and respond to needs to the industry in question. In some scenarios, investments in new projects and products require massive financial resources. These resources will ensure that the project implemented runs smoothly for the success of the organization. Before investing in any project, organizations usually analyze various aspects of the project. Some of the factors to consider when investing in any plan includes the cost of the investments. The overall cost of the project in question will affect the financial resources that any organization will invest into any given venture. Apart from the initial investment, another critical factor that most organizations consider before investing in any project is the profitability of the project. For any investment, the most important goal is for the project to generate profits and to return the initial investment in the quickest time possible. The nature of the economy should also be put into consideration. The state of the economy should be one which is favourable for investments (Jagongo & Mutswenje 2014, 100). There are various methods companies use when assessing the viability of a project. For IBM to make a valid decision on whether or not it should invest in the project, a theoretical analysis is performed.

When it comes to information technology, IBM rates among the industry’s best. IBM is well known for its services in which many companies prefer as they conform to present day requirements as far as innovation is concerned. For IBM, being a market leader is made possible because of its ability to sustain the level at which it produces innovative services. As a result of change and sustainability, IBM continuously produces products and services as a solution of the ever-growing needs of the ICT users. IBM has been able to come up with inventions such as cloud computing, financial services payment options, and products that are used in some sectors such as the banking sector and telecommunication industry. The implementation of these products and services required massive investments and assessing for them to succeed. For the new product that IBM is considering to produce will present a new wave of innovation that targets school going children. The new products combine aspects of innovation and simplicity as it targets a market niche that is characterized by the need of acquiring recent technology. To assess the viability of the project, IBM will use two methods in particular; the net present value method and the internal rate of return method. The two techniques will produce different results which then IBM can use to make its investment decision regarding the project.
Analysis and Presentation of Findings
Being the analysis is based on a hypothetical situation, most of the values used are as a percentage of the previous critical results in IBM’s 2017 financial statement. Based on the results of the theoretical project analysis, IBM may consider moving on with the project. As mentioned earlier, the project was based on two methods. Each of the technique analyzes the project in its unique way. One of the techniques that the IBM used in the analysis was a net present value (NPV). NPV examines the profitability of any given project by taking into consideration the net inflows and outflows. By using the NPV, IBM will assess the project for five years focusing on the value of the cash revenues in the five years.
The initial investment proposed to be used under the net present value method was 11% of IBM’s 2017 value of Property Plant and Equipment. Looking at IBM’s 2017 financial performance, the value for Property Plant and Equipment was $ 11,116,000,000. Basing the value of the investment on the previous year’s Property, Plant and Equipment, the initial investment is calculated as follows
11% × $ 11,116,000,000 = $ 1,222,760,000
In addition to the first investment made to the project, other finances were to be added in the course of the five years with each year having a rate of increase. Additional finances were made at the end of each year. The rates at which the financial injection was based on include 12%, 5%, 2%, and 1% through the end of year 1 to year four respectively. Given that in the first year $ 1,222,760,000 was pumped into the project, additional investments were $ 1,369,491,200, $ 1,437,965,760, $ 1,466,725,080 and $ 1,481,392,330 added in year 1 through year 4 in that respect.
The hypothetical evaluation of the project also included revenues that were expected to be earned by the sale of the laptops. Just like the initial cost of capital, the first years’ revenues were calculated as 2.8% of the total revenues at IBM in 2017. According to the financial statements, IBM earned revenues worth $ 79,139,000,000. Therefore, the revenues at the end of year 1 were
2.8% × $ 79,139,000,000 = $ 2,215,892,000
Moving on from the first year to the fifth year, the revenues increased at a certain percentage from the first year. The increase in revenues was calculated as 15% for the next two years as well as 5% for the remaining two years. comparing the revenues from the income expected in the first year, the following years income were $2,548,275,800, $2,930,517,170, $3,077,043,030, and $3,230,895,180. All these were factored in when determining the net present value. The values for the initial investments and additional investments all formed part of the cost of capital. The formula for the net present value is denoted by
-Cost of capital + Expected cash revenues
– $ 6,978,334,360 + $ 14,002,623,180
= $ 7,024,288,820
Given that the value obtained is positive and greater than zero, it indicates that the project is profitable and IBM should consider investing in the project.
Another approach besides the net present value is the internal rate of return. The internal rate of return measures the degree to which a project is considered to be attractive. IRR is the rate where all net present values of inflows adds up to zero. In contrast to NPV, IRR used different values to calculate the initial cost of the investment as well as the income expected over the five years. There were no additional financial resources made using the IRR. Under IRR, the whole project cost 10% of the Property Plant and Equipment in 2017.
. The capital used under IRR was
10% × $ 11,116,000,000
= $ 1,111,600,000
The income earned by the project under IRR increased with the years. The revenue for the first year was 2% of the company’s revenues in 2017 after which the revenues were to increase at a rate of 5% each year up to the fifth year. Keeping that in mind, the revenue values from the first to the fifth year was
$ 1,582,780,000, $ 1,661,919,000, $ 1,745,014950, $ 1,832,265,700, and $ 1,923,878,980. Factoring in all these for internal rate of return, the actual amount was calculated to be 145%. The return rate is far much higher than expected and going by the value then IBM should consider investing in the project. Both methods produce values that favor IBM’s decision to invest in the new laptops.
Critical Discussion and Recommendations
Having assessed the viability of the project using the two methods, it is my recommendation that IBM invests in the project. The values obtained indicate that the project is highly profitable and IBM will get back its initial investments as the shortest time possible. However, IBM needs to address some few issues. The evaluation is based on a hypothetical scenario, and so the values used to evaluate the project are estimates. The costs are revenues in the real situation may be the same as the estimates, or there may be some variance. In addition to the values being estimates, some certain factors should be considered. One of the elements includes the economic condition at the time of investment. The economic situation, in this case, involves all aspects including the interest rates and inflation levels. The hypothetical evaluation is based on a scenario where the economy is performing well. Changes in the economic condition enable the costs used in the assessment to change. Economic conditions mostly affect interest rates and affect the cost of production. The costs of investing in the project may be high with corresponding low returns.
Another critical issue is the methods used to evaluate the project. Apart from each one of them having a different approach in assessing the investment, discounting rates were not used to evaluate the evaluation. The cash inflows used in the evaluation were taken as a whole, and no discounting rates were used to adjust for the present values of the revenues. IBM should create the theoretical analysis by making adjustments to include any economic factors that might affect the project in the future. By doing so, any future changes can be factored in, and the true worth of the investments will be evaluated. Being a hypothetical evaluation, the results may or may not be an accurate reflection of the viability of the project.
Overall Reflection and Conclusion
IBM has been able to survive and thrive well in the information technology sector due to its constant innovations that cater to different markets. Given that the information technology sector is one which changes within a short period, companies should find ways of continually satisfying the needs of its customers. IBM is considering rolling out a new product that will target a specific market niche consisting of the young school goers. Before investing, a hypothetical evaluation of the project is conducted to determine how profitable is the plan. Based on the review, IBM should consider investing in the project. However, certain factors should be considered for a more practical and realistic evaluation. Having factors such as inflation and interest rates adjustments will give IBM a more effective evaluation of the project.
References
Jagongo, A. & Mutswenje, V.S. (2014). A survey of the factors influencing investment decisions: The case of individual investors at the NSE. International Journal of Humanities and Social Science, 4(4), 92-102.