My family is in the business of production. They have installed computerized embroidery machines. The business model is such that buyers, who are whole sellers of female embroidery suits, contact the factory and place order. They purchase the dyed base cloth from the market and along with the design send those to the factory. My family charge them according to no. of stitches and once the embroidery is done the lot is returned back and the buyer is charged off with the amount of work (embroidery) done on the cloth sent.
My Uncle also deals in selling the machines. One typical machine costs around 2.5 million PKR. The origin is China and he has developed significant credentials in this field. I was observing him while dealing with a potential customer. He was informing him that a 42 head stitch sequin machine is worth 2.9 million because it gives the option of being operated only on thread (without sequin - a start like element placed on clothes) through sequin and also act as a 21 head machine. Since the market trends keep on changing, the sequin is not in fashion through out the year but in some months, installing this machine provides the option of managing both the seasons and with high volumes of production and less. While listening to what he was saying, my mind immediately went to the topic of Real Options in Corporate Finance. I was wondering about the flexibility option of the machine which apparently worth 4 hundred thousand. While calculating the NPV of the project incorporating the effect and value of this real option will generate a more realistic result and can aid in analysis. The beauty is the connection which developed immediately in my mind regarding the topic and I was able to recall and connect what I had learnt with something happening in front of my eyes. Believe me my uncle and the buyer would have no idea of the analytical aspects connected with this option. For them it would have been something which must happen like this but at that time, my mind had started processing about calculating the NPV of that project and incorporating the value and cost of this option. I was wondering that is how this course develops skills and knowledge. Its not necessary that we need to be at the right place to apply this knowledge but in business transactions happening in front of use, this knowledge is pretty helpful!
My Uncle also deals in selling the machines. One typical machine costs around 2.5 million PKR. The origin is China and he has developed significant credentials in this field. I was observing him while dealing with a potential customer. He was informing him that a 42 head stitch sequin machine is worth 2.9 million because it gives the option of being operated only on thread (without sequin - a start like element placed on clothes) through sequin and also act as a 21 head machine. Since the market trends keep on changing, the sequin is not in fashion through out the year but in some months, installing this machine provides the option of managing both the seasons and with high volumes of production and less. While listening to what he was saying, my mind immediately went to the topic of Real Options in Corporate Finance. I was wondering about the flexibility option of the machine which apparently worth 4 hundred thousand. While calculating the NPV of the project incorporating the effect and value of this real option will generate a more realistic result and can aid in analysis. The beauty is the connection which developed immediately in my mind regarding the topic and I was able to recall and connect what I had learnt with something happening in front of my eyes. Believe me my uncle and the buyer would have no idea of the analytical aspects connected with this option. For them it would have been something which must happen like this but at that time, my mind had started processing about calculating the NPV of that project and incorporating the value and cost of this option. I was wondering that is how this course develops skills and knowledge. Its not necessary that we need to be at the right place to apply this knowledge but in business transactions happening in front of use, this knowledge is pretty helpful!
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