Long Term Investment Decisions Essay

Long term capital decisions involve choosing how to finance long term projects. For a movie rental company, such decisions would include opening new shops in new markets or buying new machinery that would improve the firm’s technology. Before making such decisions, a firm has to do an analysis of the returns that the new project would bring against the cost outlay of the project. There are several ways of doing such an analysis. They include the payback period, net present value, internal rate of return among others. The main aim of conducting this analysis is to determine whether the expected returns meet a certain predetermined benchmark, usually higher than the risk free return. Rationale for government intervention The United States government intervenes in business processes in a number of ways; it has formulated regulation that governs the film distribution industry to ensure a level playing field, ensuring employee protection, protection of the environment etcetera. For instance, there are laws that govern advertising. These laws are set to ensure that advertisers are truthful and honest in their adverts. To protect the rights of employees, the government regulates issues such as the minimum wage payable to an employee, the maximum working hours and a good working environment. In addition, the government has put measures that regulate waste management and protection of the environment. Through the environmental protection agency, the government ensures businesses comply with environment protection regulation in order to protect the environment (Graham et al, 2010). Why Government Regulation is needed Governments in all countries in the world regulate business for both economic and social reasons. In the recent past governments have continually regulated businesses for economic reasons mostly to prevent falling productivity especially in developed economies. Social regulation is practiced in order to ensure businesses comply with the social or the moral expectation of the public. For instance in a movie rental company, the government would engage regulations that restrict distribution of pornographic and other banned films or limits the distribution to only the age appropriate groups (Khan & Jain, 2004). The main reason why a government is formed is to protect the rights of its citizens. There are a number of rights that if not protect may lead to social unrest. A government should ensure that property rights are enforced to ensure that the producers leap from their hard labor. In addition, the government should ensure the kind of media that is on sale is age appropriate. It should protect kids from content that may not be appropriate to them. For example, small kids should not be allowed to access pornography or content that is extremely violent. Another reason why a government should regulate businesses is to ensure a level playing ground for all firms. Because of the disparities in some resources a firm may possess an unfair advantage over other firms. In order to ensure that an industry is competitive, the government has to ensure that the industry has a level playing field and needs to be regulated. For instance, in the movie industry, the government may come in to break cartels that form in order to influence the prices of production and the distribution channels. Specifically, a government can put in place regulations that liberalize the market and break such cartels. In addition, the government has a moral obligation to protect the environment by ensuring that hazardous material is properly disposed. In a movie rental company, there are a lot of technological wastes generated. Lack of proper disposal of pc’s and other such like materials that cause cancer to humans may lead to increase in incidents of cancer. Therefore, the government must come up with measures that ensure that there are proper disposal mechanisms for such waste. The benefits of a merger There are a lot of advantages that blockbuster would enjoy as a result of forming a merger. One of the greatest advantages of forming a major is that blockbuster would enjoy the economies of scale as a result of operating as a larger company. Economies of scale occur as a result of reduction of average costs as a result of increased output. In addition, the merger can help blockbuster achieve diversification. For example, blockbuster can merge with firms that provide a different service from what it offers. By doing so, block buster will obtain access to knowledge and expertise that may help the firm gain competitive advantage. However, the advantages of forming a merger depend on a number of factors. Specifically, the success of a merger depend on the scope of economies scale created, effects on monopoly power, and the effects on cost. However, due to the threats, blockbuster chooses to pursue its expansion plan by capital investment. Capital projects are long term investments that are made to build on, or improve a capital intensive project. A project that is capital intensive requires the input of considerable amounts of capital especially financial and labor to start and run. They also require a lot of planning and resources. There are a number of ways that a firm can finance capital projects. Before determining the best way to finance capital projects, a firm should seek to determine the costs, the viability of the investment and the stream of returns from the investment. Despite the advantages of forming a merger, there are a lot of complexities that makes it less attractive to form a merger. For example, there is the issue of dilution of control. By forming a merger, the firm will reduce the amount of control it has on decision making. It will have to contend with the inclusion of new investor who will inherit the right to vote on significant decisions. This may change the goals of a company and work to slow decision making. A merger also reduces the public’s confidence in a firm. The public may construe the move as a measure to save the firm from imminent failure. In order to eliminate these complexities, it becomes paramount to seek alternative ways of expanding a business. One of the alternatives is capital expenditures. However, it is not overly advantageous. Complexities of funding expansion using capital expenditures The cost outlay of financing capital expenditures is particularly high. Therefore, a firm has to do a comprehensive review of the cost and benefits of using the available funds to expand the business. In addition to the cost, capital expenditures require a huge investment of time and labor. Given that these resources are limited a firm is constrained by the availability of the factors of production. For a firm that has limited resources will find it extremely difficult to expand via capital expenditures. Convergence of the needs of the stockholders and managers The need of stockholders is to maximize increase their wealth. On the other hand, the management aims to achieve management efficiency and increase a business’s competitiveness. The common goal of both parties is profitability. A stockholders wealth is increased significantly by profits. On the other hand, a business becomes efficient if uses the least resources to achieve the greatest possible profit (Thukaram, 2003). The method of expansion chosen for the firm will be the most efficient and that will maximize the return on investment by the stockholders. To determine the returns from the investment a firm can use scientific ways of measuring the highest possible level of returns. These methods include, evaluating the marginal rate of return for the project.