Step 2:
Capital Investment Decisions for Hong Kong Exchanges
Option 1: In order to be able to contact more clients and make more sales, Hong Kong Exchanges could update their computers and their computer systems so that they are faster and more efficient. This will then lead to faster and more pleasant service for clients which is gives HKEx a competitive advantage.
Option 2: HKEx could build an extra office inside their current building to allow more staff to be contacting clients and making sales, which would include the purchase of new computers still with the current system in place. This would mean that clients would almost always get through to an employee straight away when they call or email and would have a more pleasant experience because of this. This also means that when not in use for sales, this new office space can be used for meetings and training instead of having to pay to hire a venue to do such things.
The investment would be commence on 1st January 2016 with estimated future cash flows expected to be received on 1st January in the following years.
In order to evaluate which of these options will have the greatest advantage for HKEx, the following financial analysis will be completed using these calculations: Net present value (NPV), internal rate of return (IRR) and the payback period for both of the options.
Option 1 - $’000
|
Option 2 - $’000
| |
Original Cost
|
$1025
|
$1,400
|
Estimated Life
|
6 years
|
8 years
|
Estimated Future Cash Flows
| ||
2016
|
320
|
500
|
2017
|
360
|
550
|
2018
|
400
|
600
|
2019
|
440
|
650
|
2020
|
480
|
700
|
2021
|
520
|
750
|
2022
|
560
|
Based upon the results from the IRR, NPV and calculation of the payback period, option 2 is the smarter option. The return rate is just over 1% higher but because the capital that is being invested in in step 2 is not only technology and equipment but also a “space” which can be used for alternative purposes, it has potential to be leased, hired or even sold if the company no longer finds it useful.
I was surprised to find that option 2 was the more viable option considering it would cost a fair chunk more to do but because of the added income associated with increased customer contact, the savings associated with being able to use the room as a board room/training room instead of having to rent a space or cutting productivity because they needed to do training with half of the computers in the main floor. These savings quickly added up and the investment paid itself off much faster than expected.
Hong Kong Exchanges
| ||||||||
Option 1
| ||||||||
$'000
|
$'000
|
$'000
|
$'000
|
$'000
|
$'000
|
$'000
|
$'000
| |
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
|
Year 7
| |
(1,025)
|
320
|
360
|
400
|
440
|
480
|
520
|
560
| |
NPV
|
$1,043.42
| |||||||
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
|
Year 7
| |
(1,025)
|
320
|
360
|
400
|
440
|
480
|
520
|
560
| |
IRR
|
33.60%
| |||||||
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
|
Year 7
| |
(1,025)
|
320
|
360
|
400
|
440
|
480
|
520
|
560
| |
Cumulative Cashflow
|
(705)
|
680
|
760
|
840
|
920
|
1,000
|
1,080
| |
Payback Period
|
6 Years
|
3.75
|
Month(s)
| |||||
Hong Kong Exchanges
| ||||||||
Option 2
| ||||||||
$'000
|
$'000
|
$'000
|
$'000
|
$'000
|
$'000
|
$'000
| ||
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
| ||
(1,400)
|
500
|
550
|
600
|
650
|
700
|
750
| ||
NPV
|
$1,261.84
| |||||||
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
| ||
(1,400)
|
500
|
550
|
600
|
650
|
700
|
750
| ||
IRR
|
34.72%
| |||||||
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
| ||
(1,400)
|
500
|
550
|
600
|
650
|
700
|
750
| ||
Cumulative Cashflow
|
(900)
|
1,050
|
1,150
|
1,250
|
1,350
|
1,450
| ||
Payback Period
|
5 Years
|
6.00
|
Month(s)
| |||||
