Accounting Business Reporting for Decision Making

512 Accounting: Business Reporting for Decision Making

TABLE  12.3 Outlays and NPVs for proposed projects

Project Outlay ($A million) NPV ($A million)

Brisbane 100 8.2

Sydney 80 6.9

Perth 60 4.4

Melbourne 40 3.0

Adelaide 20 1.6

Is Brisbane the best project for the entity to undertake? It does have the highest NPV. However, the

answer is ‘no’. Suppose an entity has access to $100 million in finance, it could undertake the Bris-

bane project and earn $8.2 million. Alternatively, it could undertake two projects that together involve

an investment not exceeding $100 million. In this case, it could undertake the Brisbane project or

both the Sydney and the Adelaide projects, or the Perth and the Melbourne projects. The NPVs of

these groups are $8.2 million, $8.5 million and $7.4 million. Thus, the best decision for the entity

would be to undertake both the Sydney and Adelaide projects, to earn $8.5 million. So, the project

with the highest NPV may not be the best project when capital is limited. Sometimes, entities will

invest in a range of different projects with differing NPVs as part of their long-term business strategy.

The reality check ‘IBM and HP are looking at diversification, but where should you invest?’ dis-

cusses IBM and HP’s investment in diverse products with different NPVs to assist with growth given

the slow personal computer market.

REALITY CHECK

IBM and HP are looking at diversification, but where should

you invest?

Hardware giants like  International Business Machines (NYSE:IBM) and  Hewlett-Packard (NYSE:HPQ)

are diversifying into more areas to propel growth given the slowing personal computer market. Cyber

security and cloud computing are among the most talked-about markets in IT solutions growing at a

rapid pace. The products such as mobile communications, cloud computing, and security solutions are

being focused upon by IBM since they are higher margin markets with higher growth products. Acqui-

sitions and partnerships are considered as the ideal ways to step into such markets. IBM’s rock-solid

cash position has enabled it to make a few acquisitions and its established brand image has enabled it

to enter into agreements with leading players.

IBM acquired Xtify to broaden its portfolio in mobile communications software. The mobile payment

transactions might exceed $235 billion as forecasted by Gartner. The bump in the number of mobile

users resulted in the rise in transactions. The market is forecasted to be worth $998.5 billion by 2016 at

a CAGR of 83.7% from 2012 to 2016. The acquisition of Xtify by IBM would place it in a better position

to capture this booming mobile communications and payments market. IBM recently acquired Now

Factory, making a big leap into the mobile analytics market. The mobile analytics software market will

experience an exponential growth of mobile gaming and video streaming in the future with IBM aggres-

sive on this opportunity.

IBM is making huge investments in the cloud computing platform with its dedication reflected by the

synergies with companies providing cloud services. The cloud market is expected to grow by 126.4%

globally, with growth in the European market to be around 300%. IBM plans to build upon this growth

by venturing into Europe with its investments and partnerships. IBM is investing $8 million in Spain for

cloud data centers. It is confident about its returns on such investments across the globe, targeting

around $7 billion in revenue by 2015 just from the cloud computing market.