Various political, economic, legal, technological, environmental, etc. factors have to be considered before making any investment decision. A cost-benefit analysis can be conducted using the payback period or break-even analysis. The payback period is usually the time within which the firm recovers its initial cash outlay. Every company has its own standard for setting the payback period. Shorter the payback period the better because in that case, the firm would be able to earn profits much earlier. In the case of machinery, there is an estimated period for which the machinery can operate this is generally known as the economic life of the machinery.
A break-even analysis may also be used to analyze the uncertainty or the risk of investment and the approach converts uncertainties into calculated risks. The break-even analysis of a project is used to determine the lowest cost of production at which the project has to operate in order to keep out of financial trouble. The payback period can be used to evaluate the project’ s break-even point in years (Jackson, Sawyers, and Jenkins, 2008, p. 204). The lower the break-even point, the greater is the prospects of a project’ s future earning and less is the chance of incurring loss (Baker and Powell, 2005, p. 248).
One will also have to consider the risk factors considering current economic scenario resulting from PESTEL analysis. The following are some of the identified risk factors for setting up a manufacturing base in the UK: Funding – It is one of the most significant factors in a business. Without funding or access to capital, one cannot proceed with the functioning of the business. There is a need to be pragmatic about establishment costs.
New entrepreneurs often misjudge the time it takes for a business to start earning profits and the amount of money required to be invested in the business before it proves profitable. Developing an honest and thorough financial plan will help in avoiding this mistake.
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