Discuss about the Financial Management for Airway Technologies.
Suggestion of an Approach for Providing a More Insightful Result:
In accordance with the provided case, Ed Draycutt has been identified as the engineering manager of Airway Technologies. This provided case could be best explained with the help of scenario analysis, as the above-mentioned analyst has ascertained a specific scenario. This scenario involves change in the industry regulation or standard where it would be mandatory for the organisations operating in the industry to adopt the system A. With the help of scenario analysis, the variables could be modified within the model to match with the scenario (Miku?ionien?, Martinaitis & Keras, 2014). By placing all these together, a comprehensive picture could be obtained. Hence, an overall group of results could be known through provision of each extreme along with the understanding of the results for each variable defined with the help of case scenarios.
In addition, the use of investment appraisal techniques like net present value and internal rate of return has been made after the cash flows are determined. With the help of these techniques, the organisation could undertake decisions regarding whether to proceed with the project or curbing the same (Delen, Kuzey & Uyar, 2013). It has been observed that these values are highly positive, which denote undertaking of the system. However, as these techniques fail to take into account the effects of inflation on system installation, it could lead to minimisation of overall profitability. Hence, the need to use scenario analysis is crucial for the organisation for assessing the viability of the proposed investment.
In order to tackle this situation, decision tree approach is deemed fit for the study, as it anticipates future results and allocating probabilities to the events (Schreiber & Thomas, 2017). The outlook of the decision trees is identical to that of the flowcharts; however, these have been formulated to choose the most pertinent strategy. Decision nodes, chance nodes and end nodes are the three main kinds of nodes on decision tree. Such tree is solved from up to down for ascertaining the most effective strategy. However, Luo & Lin (2013) argued that there might not be any optimal strategy; however, the tree is highly valuable to map out the alternatives faced along with their benefits and costs.
In this case, the decision tree approach has been deemed fit due to the fact that it depicts multiple results to take risk on this particular investment. As a result, it could lead to the generation of both gain and loss. In addition, the approach helps in representing the various probabilities associated with net present value. As there is occurrence of two distinct events, the probability of each of them is 98%. Thus, the probability of occurrence of both the events is 96% (98% x 98%). Therefore, the estimates of cash would be minimised by 4%. As a result, it would help in minimising the overall risk and return associated with the investment and the management could undertake appropriate decisions regarding whether to install the proposed system or not.
Miku?ionien?, R., Martinaitis, V., & Keras, E. (2014). Evaluation of energy efficiency measures sustainability by decision tree method. Energy and buildings, 76, 64-71.
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.
Schreiber, S. G., & Thomas, B. R. (2017). Forest industry investment in tree improvement–a wise business decision or a bottomless pit? Answers from a new tree improvement valuation model for Alberta, Canada. The Forestry Chronicle, 93(1), 38-43.
Luo, B., & Lin, Z. (2013). A decision tree model for herd behavior and empirical evidence from the online P2P lending market. Information Systems and e-Business Management, 11(1), 141-160.