Building a New Facility in Germany: Pros and Cons

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Table of Contents

Introduction
Advantages and Disadvantages Associated with Manufacturing a New Facility
Advantages and Disadvantages Associated with Acquiring the Existing Business
Reference List

Introduction

Tovell plc as a manufacturer of kitchen furniture needs to decide on the most appropriate option for investing in order to guarantee the high profitability of the business. In this context, it is important to pay attention to both potential advantages and disadvantages for the company in relation to manufacturing a new facility and acquiring the existing developed business. This assessment represents possible advantages and disadvantages associated with building a new facility in Germany and with acquiring the existing developed business in the United States.

Advantages and Disadvantages Associated with Manufacturing a New Facility

The main reason for manufacturing a new facility in Germany is the possibility to build the subsidiary that completely addresses the firm’s needs and operation principles (Madura 2014, p. 54). The other financial advantage is the low costs planned for the first years of construction (2015-2016) in comparison with the immediate large costs needed for the acquisition of the business in the United States. In this context, the forecasted costs seem to be balanced for the first two years of the project. Tax allowable depreciation in Germany for machinery can also be discussed as a positive aspect for decreasing the overall end tax for the company. Furthermore, within the European Union and Euro zone, it is possible to respond immediately to the threats of inflation.

The disadvantages include the late rewards from the investment in construction because of the necessity to complete the building process and to start production quickly. In addition, the costs associated with constructing the facility in the undeveloped green field site can be higher than the projected costs (Mun 2012, p. 112). Furthermore, during the following several years, the actual demand for manufactured items can be lower than the projected one, and this fact can influence the overall cash flow balance.

Advantages and Disadvantages Associated with Acquiring the Existing Business

In case of Tovell plc, the expected advantages of purchasing the business are associated with the possibility to obtain the significant share in the foreign market. The other advantage is the possibility to receive large revenues during the first year of the project because of the need to invest only in the machinery and working capital, without developing the construction process (Eiteman, Stonehill & Moffett 2013, p. 24). As a result, the pre-tax net cash flows are expected to increase in 2015 and then, in 2016. The large investment in the business that is expected during the first year of the project can be discussed as only the short-term issue.

However, this aspect associated with acquiring the business by Tovell plc in the United States can be assessed as a disadvantage because of large investments required during 2015 in order to start operations. The reason is that Tovell plc needs to invest more than $20 million in the business in the United States during one year. In addition, the risk of losses is also high. Much attention should be paid to projecting the transportation costs in this case. One of the most influential disadvantages is the shift in the exchange rate that can influence the company’s profitability and debt significantly. As a result, the additional strategies should be developed to reduce the general risk of inflation and exchange rate risks.

The acquisition of more facilities is a challenging for companies because of the necessity to decide whether it is appropriate to set up a new manufacturing subsidiary or it is profitable to purchase the existing facility.

Reference List

Eiteman, D, Stonehill, A & Moffett, M 2013, Multinational business finance, Pearson Education Limited, Harlow.

Madura, J 2014, International financial management, Cengage Learning, London.

Mun, J 2012, Real options analysis: tools and techniques for valuing strategic investments and decisions, John Wiley & Sons, New York.

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Building a New Facility in Germany: Pros and Cons

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