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Risk and Project Financing Decisions Essay

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Updated: Jul 12th, 2020

Managing risks is an essential part of being a company leader; consequently, the latter often needs to make the choices that determine the further shape that an organization is going to take, including the expansion opportunities. As a result, the need to use the frequency distribution, as well as the analysis of the existing probabilities and the identification of the expected value. Although both the idea of choosing a real estate development and the concept of evolving as a retain franchise for Just Hats seem quite legitimate suggestions for the following integration into the global market, one must admit that some of the risks that the latter option involves allow suggesting that the real estate industry will be more favorable for the organization as far as the company’s returns are concerned. Despite the fact that the real estate related option poses quite a tangible threat to the future of the company in general, as it presuppose acquiring a zero income in the worst case scenario, the overall expected value of the real estate exceeds the one that the company will retrieve if it decides to create a franchise.

An estimated value of the real estate related solution is clearly larger than the one of the real franchise with Just Hats, the correlation between the two being approximately 1.17 (the real estate value amounting to $3,100,000, whereas the real franchise reaches only $2,650,000, as the calculations provided in Appendix A show). One must bear in mind, though, that the option involving the real estate business has only beaten the alternative by a very narrow margin. Indeed, a closer look at the subject matter will show that the difference in the outcomes makes only 14%.

To be more exact, the $450,000, which entering the retail industry is different from the franchise option by, is a rather small percentage, which can be considered a minor advantage of the specified option, seeing that it involves greater risks (Derkinderen & Crum, 2012). With the franchise created with Just Hats, even in the worst case scenario, there is a positive outcome; specifically, the company obtains a $1,000,000 income even in the instance of a low NPV. Entering in the real estate domain, in its turn, may result in gaining nothing, seeing that the estimated value for the above-mentioned outcome makes $0 according to the existing conditions. Herein the key problem regarding the choice lies; the organization may face the situation, in which its PV will be reduced to zero at some point.

Nevertheless, the choice that presupposes entering the real estate market seems to be the most legitimate one in the specified scenario. To succeed, the company will have to create a unique marketing strategy and a set of strong corporate values, the organization will be capable of putting a rather solid promotion campaign together; as a result, the firm will expand its target audience considerably by targeting at new clients as well as creating the premises for retaining the loyal ones. Despite the fact that the risks are considerably higher than in the alternative scenario, the stakes are rather high as well. Consequently, in the instance of a positive outcome, the company is most likely to retrieve an impressive amount of revenues once a strong leadership strategy is chosen and the staff members are motivated for excelling in their performance.

Therefore, the idea of a real estate field as the next area for the company to explore is clearly worth consideration. Although the negative outcomes may lead to a halt in the organization’s key processes, the chances for the firm to perform badly in the target market are quite low. Thus, the real estate option needs to be looked into.

Reference List

Derkinderen, F. G. J. & Crum, R. L. (2012). Risk, capital costs, and project financing decisions. Medford, Massachusetts: Springer Science & Business Media.

Appendix A

States of Nature/Probability
F1: High NPV F2: Medium NPV F3: Low NPV
p1 p2 p3 Expected Value
Alternatives 0,5 0,3 0,2 1,0
A1: Real estate $5,000,000 $2,000,000 $0 $3,100,000
0,75 0,15 0,1 1,0
A2: Real franchise with Just Hats $3,000,000 $2,000,000 $1,000,000 $2,650,000
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IvyPanda. 2020. "Risk and Project Financing Decisions." July 12, 2020. https://ivypanda.com/essays/risk-and-project-financing-decisions/.

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