FINACIAL ACCOUNTING

Advanced Micro Devices Inc (AMD) is a global business that focuses on the manufacturing on semi-conductor devices, which are useful in the processing of computers. Some of the main products manufactured and distributed by AMD are graphics processors, chip sets, flash memories and other consumer electronic products. Globally, AMD is recognized as a major supplier of computer chips to other technology firms. AMD was created in 1969 by Jerry Sanders. In 1970, the company went public, a move, which helped to grow the capital to help the company expand its production of computer chips in the markets. Over the years, it has grown significantly to challenge the dominance of Intel Corporation in the manufacturing of microprocessors for computers.

In 2000, the company created a remarkable processor, Athlon, which was used in the running of windows operating system of Microsoft. The microprocessor was critical in improving the speed and efficiency of the computer devices in the market. In 2006, AMD acquired AT Technologies, which had a strong manufacturing infrastructure for video graphic cards. After two years, the company made an announcement of dividing its overall operations into unit of designing of the microprocessors and the other unit, the manufacturing division. In 2014, AMD restructuring its operations into computing and graphics, which helped to improve the strategic performance and progress of the company. Some of the major competitors of AMD in the graphics industry include IGP chipsets, integrated graphics processors, and discrete processors. NVidia and Intel are two major rivals that impacts on the growth of the revenues and market share of AMD in the graphics market. The management of AMD has invested in research and development to continue with the products and services offered to the company. The research will evaluate the capital investment decision of AMD on whether to outsource or produce the graphics processors internally.

Financial Health of the Company

Over the last five years, AMD has enjoyed a positive turnaround success supported by the development of new products and growth in profitability. The company is also looking to acquire Xilinx, which is a transformative strategy that will expand the market share of the company and thus, leading to the growth in the total revenues of the business. In the 4th quarter of 2020, AMD reported 19.3% growth in the total sales in the PC processors (Seitz, 2021). The growth in market segment shares provides an opportunity to growth in the profitability of the company. On March 15, the company announced the development of advanced processors, which will promote high-performance computing and improve efficiency of the data centers and server applications (Seitz, 2021). Over the last five years, the revenues of AMD have been growing significantly from $4,272 million reported in 2016 to $9,763 million reported in 2020. The improvement in the revenues shows the sustainability and ability of the business to develop new products that meets the needs of the customers in the market.

A major indicator for the strong financial health of AMD is the increase in the net margin of the company. In 2020, AMD reported one of the highest net margin over the last 5 years of 25.50% because of the increased demand for video game and PC chips and processors. The return on equity and return on assets jumped to 57.48% and 33.22% respectively in 2020 (Advanced Micro Devices, 2021). The liquidity position of the business remains positive over the last five years with the current and quick being over 1.00. In 2020, the current ratio improved to 2.54, which shows the expansion of the current assets of the corporation that can pay for the short-term debt. The debt level in the capital structure was low in 2020 at only 9%. Therefore, AMD has a positive financial health, which helps them to reserve in research and development programs to meet the growing demand for computer chips and processors.

Capital Investment Appraisal Techniques

Some of the capital investment appraisal techniques, includes the profitability index, net present value, and the payback period. When considering a new project, the company will evaluate the viability and the profitability of the project in the business operations. The payback period evaluates the time taken for the company to recover its initial capital investment from the net cash flows of the project. The project with a shorter payback period will be chosen because it will help AMD to recoup its overall investment within the shortest time possible (Kengatharan, 2018). The benefits of the payback period is that it is easy to compute and it does not require with advanced understanding of finance. However, the approach ignores the critical principle of time value of money.

The net present value is the total of the present value of the net cash flows of the projects. Positive NPV is a good indication of the viability of the projects. However, the company is recommended to choose the project with a higher NPV because it will be more profitable for AMD. On the other hand, the profitability index is important in evaluation the earnings per every dollar the capital investment in the projects will yield for the company (Gupta, 2017). Like the payback period, the profitability index is easy to adopt and reduces the complexity of the computation of NPV. The management of AMD will not rely on the results of a single investment appraisal technique because incorrect estimates would lead to poor choice of the right project. Therefore, the findings from all the techniques will be important to guide the company in making the right investment decision.

Computation of the Capital Investment Appraisal Techniques

1. Payback Period.

Payback period, A, Outsourcing = 3 years.

Payback period, B internal production= 2 years + $50m/$85m*12months

= 2 years and 7 months.

2. Net Present Value.

3. Profitability Index.

Recommendation and Justifications

AMD should choose option B, internal production because it is more profitable than option A, outsourcing. The payback period of option B was shorter than option A at 2 years and 7 months compared to 3 years for option A. The company will recover its investment in internal production of the chip and processors with a shorter period. The net present value for option B was higher at $31.567 million compared to $31.365 million for option A. The higher NPV shows the expansion in the value of the investments from the positive and higher net cash flows of AMD. The profitability index of option B was slightly higher at 1.158 compared to that of option A at 1.157. The management of AMD should capitalize on the internal productions to improve the long-term strategic success of the business. Internal production of the processors and chips has various benefits over the outsourcing method. The internal production will help to improve flexibility because the company change the design of the products easily. The option will also help to improve the quality of the products because the firm has significant control over the manufacturing and production process. Other benefits would involve the reduction in the costs of management, gaining control over production, improving public relations, and logistics.

Conclusion

To sum up, the capital investment appraisal techniques were beneficial in making the right options for the production of the additional computer chips and processors to meet the needs of the customers. Advanced Micro Devices Inc (AMD) is a global firm that focuses on the manufacturing on semi-conductor devices, which are useful in the processing of computers. The products of AMD, includes graphics processors, chip sets, flash memories and other consumer electronic products. AMD has enjoyed a positive turnaround success supported by the development of new products and growth in profitability. The financial health of the company remains strong with sound liquidity levels and growth in revenues. The useful capital investment appraisal techniques are profitability index, net present value, and the payback period. The techniques helps to will evaluate the viability and the profitability of the production projects on the company. The recommendable option is option B, internal production because it is more profitable than option A, outsourcing. The payback period of option B was shorter and it also had improved NPV and profitability index. In-house production improves flexibility of manufacturing functions and gives the company more control compared to outsourcing.

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