Having reached a crossroad in his business Jaya Ongko therefore to make the best decision for the future

of his company he must compare multiple courses of action. Its important that Jaya focuses his attention on the concepts of the competitive economic advantage in the furniture industry, the value and economic efficiency of his furniture store, and on observing his businesss financial transactions. I had the pleasure of sitting down with Jaya Ongko and obtaining a better understanding of the transition that the company has taken from being at the top of the furniture manufacturing chain to now just trying to stay afloat. In fact, I discovered that he has already begun to explore these concepts while analyzing the new landscape of competition in the Bali and international furniture markets. I have taken what we conversed about and developed a brief synopsis of our conversation. By implementing the principles that will be discussed, Ongko Furniture will be able to select the best alternative direction for the company to go in that will ensure Jaya long term success.

Jaya was faced with a serious decision. Now that hes entered a more competitive economic environment its imperative that he find an advantage to have over the other furniture manufacturers. In order to do this, I explained to Jaya that he must act with his own financial self-interest in mind while maintaining a balance of good ethics. The price of furniture dropped and its very difficult to continue to watch your companys profit margins decrease while the costs associated with operating the furniture store continues to increase. The cost of labor as well as production had increased right before his eyes. In this scenario, the objective is to get the most good out of the available resources

that he has as possible. There are several options on the table for him to consider including: merging with another company, purchase new furniture making equipment, or begin focusing more on furniture distribution. I recommended that Jaya perform an analysis of the opportunity cost associated with each of these options. Some other useful principles to take notice of in his competitive economic environment include: understand and acknowledge that each financial transaction has at least two sides, actions speak louder than words, and pay attention to what the competition is doing. Unsure of the most feasible decision to make, he has to act with a sense of urgency as time is not on his side. The longer he procrastinates, the more money that Ongko Furniture will continue to lose (Emery at el, 2007).

In order to make the best and most informed management decision on behalf of the company Jaya will need to understand the value of new ideas. The company can realize astronomical returns by finding a new niche. This will take the development of new and innovative ideals that may be in the form of improvements or an increase of marketing. Ongko may want to bring in a business consulting firm with more expertise in creating value and exploring every option thats available to the company because we pay others to do what they specialize in. A financial consultant will prove to be very instrumental as it relates to determining the incremental benefits of the company (Emery at el, 2007).

There are major costs associated with the conversion of the handcrafted manufacturing plant over to an automated one. At the same time, the cost of labor will significantly decrease by implementing the highly automated manufacturing equipment. Upon analyzing the numbers that are associated with the introduction of new equipment the decision will ultimately be based on whether a net change in profit can be realized. In closing, Ongko Furnitures financial transactions will be closely observed in order to: help establish whether there is a fair trade off of risk for the desired return on invested capital, ensure that those investments are well diversified and not all placed in one basket, and that those investments are followed on the capital markets to take advantage of all opportunities of arbitrage. Since money has a time value, the company should also expect make a profit from any money and credit that it extends in order to offset some of their additional expenses (Emery at el, 2007). References Emery, D.R., Finnerty, J.D., & Stowe, J.D. (2007). Corporate financial management (3rd ed.). New Jersey: Pearson-Prentice Hall. Ongko Furniture Store Scenario II Bali, Indonesia, a beautiful vacation spot, is also a large furniture manufacturing location in Southeast Asia. Balis supply of timber and inexpensive labor has made it easy for Jaya Ongko to make furniture for years near his Bali home (UOP, 2011). As global competition enters the market with high-tech equipment that produces high quality furniture for a lower cost, Ongko begins to feel the pressure. The nearby opening of one of the largest retailers in

the nations headquarters, along with community development that results in increased labor costs, create a larger issue for Ongkos company. Ongko is currently experiencing a lower profit margin, and it is time to follow one of three alternatives: maintain its current position; implement a new high-tech system; or become a broker for a furniture manufacturer overseas. Ongkos managers will use capital budgeting techniques to choose the best alternative that enables the companys competitive advantage. This proposal presents an analysis of the optimal weighted average cost of capital (WACC), the use of multiple valuation techniques in reducing risks, and the net present value (NPV) of future cash flows for each of the alternatives. In determining the optimal approach for the company, Ongko must assess alternatives for financial decisions and determine the best course of action. One solution is to maintain the current business status. This option allows foreign and larger companies to enter the market with newer technology. Another solution is to expand and remodel the plant with new technology and robotic automation. In the long run, this will allow the company to lean out its manufacturing labor costs. By evaluating the opportunity costs against the initial capital expense of installing the high-tech line, management will determine if automation will offer the greatest savings and benefits over time. Decreasing cost of production and increasing revenues can only be realized if the product maintains its quality standards. The third alternative is to become a furniture distributor. Coordinating the existing distribution network and becoming a representative for a separate manufacturer may prove to be beneficial to the business.

Optimal Weighted Average Cost of Capital (WACC) There are various forms of capital budgeting techniques that should be applied to these alternative projects in order to choose the most successful of the three, and predict as well as reduce future risks. When making capital budgeting decisions The objective is to find investment projects that will add value to the firm. These are projects that are worth more to the firm than they costprojects that have a positive NPV (Emery, 2007, p. 216). This proposal illustrates the optimal Weighted Average Cost of Capital (WACC) associated with Ongkos alternatives and the use of multiple valuation techniques in reducing risk. According to Emery et al., the cost of capital is the weighted average of the current required returns on debt and equity, where the weights are the market-value proportions of debt and equity in the firms capital structure (2007, p. 209). The weighted average cost of capital (WACC) is the weighted average of the cost of equity and the after tax cost of debt, and is used to determine if proposed investments or purchases are a beneficial endeavor. Ongko's current assets consist of cash, accounts receivables, inventory and prepaid insurance for a total worth of $1,357,250. The total amount of debt the company has is $1,114,816, the cost of debt = 8%, corporate tax rate = 42%, cost of equity = 18%. The Ongko budget sheet was used to calculate the current WACC of 7.86 percent (UOP, 2011). Need to show how the WACC was calculated by plaguing in the numbers See below: The Optimal Weighted Average Cost of Capital (WACC)

The optimal weighted average cost of capital (WACC) is the average cost that a company is expected to pay to finance its assets (Emery et al., 2007). The formula is as follows: WACC= [pic] re + [pic] (1-T)rd= (1- L) re + L(1-T)rd With the above formula, Onkgos WACC can be calculated (refer to table 1): Cost of debt= 7.5% Income tax expense rate= 42% Risk free rate= 4.36% Table 1 |Year | |Weight of debt = total liability / total equity|$1,130,963 / ($1,130,963 + $211,111)= 84.3% |Weight of equity 15.7% |WACC |$1,109,358 / ($225,805 + $1,109,358)= 83.1% | |2009 |2010 Market rate = 12.0 beta= .8

|$211,111 / ($211,111 + $1,130, 963)= |

|$235,805 / ($235,805 + $1,109,358)= 18%

|7.5% x (1 42%) x 84.3% + 9.6% x 15.7% =

5.17 |7.5% x (1 42%) x 83.1% + 9.6% x 18% = 5.34 |

Multiple Valuation Techniques in Reducing Risks

A risk analysis should be conducted in the standard decision-making process for any company. Ongkos management must decide on the appropriate techniques to identify risks in each project, as well as determine the amount of risk the company is prepared to accept. There are several valuation techniques to apply to Ongkos scenario. While this proposal discusses NPV and WACC methods to ensure profitability of the project, other capital budgeting criteria can also be used along with the NPV and WACC to ensure the project is profitable. Capital budgeting techniques such as the payback and discounted payback methods are a prime example. These concepts provide a means to calculate the expected number of years required to recover the original investment (Emery, et al., 2007). For instance, calculating the simple payback period provides the expected number of years required to recover the original investment. If Ongko invested $500 million in the High-Tech line, the company should see payback within the given time period. By applying these valuation techniques, the company will understand the estimated time it will take to recover the initial cash flow. Monitoring WACC and Internal Rate of Return (IRR) also helps calculate risk. If the IRR is higher than the WACC, the project will be considered viable. Sensitivity Analysis is another method that will support decision-making. This technique is used to determine how different values of an independent variable impact the dependent variable, illustrating which assumptions have the most and least influence on the companys financial forecast. According to Emery et al., it helps determine the sensitivity of outcomes to the variation (2007, p. 304). A sensitivity analysis report accomplishes this by addressing the lack of

predictability of an outcome. Applying this report to each project will help determine the most profitable and practical solution. Net Present Value (NPV) The Net Present Value (NPV) is one of the most used and reliable methods for capital budgeting decisions. It is defined as the difference between what something is worth (the present value of its expected future cash flowsits market value) and what it costs (Emery, 2007, p. 221). NPV also uses discounted cash flow techniques to find the value of the projects cash flow in the present and future. If the initial investment for the High-tech line is $500,000, the NPV results show that in five years, this is the best option. Table One displays the before-tax NPV after five years. Table 1: NPV |Current | |$189,079 | |$412,296 |$279,049 |High-tech |Broker

OK Conclusion Jaya Ongko has made furniture near his home in Bali for years. The influx of development and direct competition has changed his business environment, and

using capital budgeting techniques that follow solid financial principles is the best way to enter into the decision-making process for the future of his business. Gaining a competitive edge is important to success, and Ongkos decision to implement the High-tech production line will provide a course of action that will be economically advantageous. Understanding the use of WACC and NPV to conduct a sensitivity analysis provides Ongko with the risks inherent to each project. The company can make a knowledgeable decision based on the amount of risk to accept and the methods to be used minimize these risks.

References Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007). Corporate Financial Management (3rd ed.). Prentice Hall, Inc. Retrieved from https://ecampus.phoenix.edu/content/eBookLibrary2 University of Phoenix. (n.d.). Ongko's Furniture Scenario. Retrieved from University of Phoenix, FIN/GM571 - International Corporate Finance website. Retrieved from https://portal.phoenix.edu/classroom/coursematerials/ University of Phoenix. (n.d.). Ongko's Furniture Budget. Retrieved from University of Phoenix, FIN/GM571 - International Corporate Finance website. Retrieved from https://portal.phoenix.edu/classroom/coursematerials/