Introduction
This evaluation of comparative risk among three investment proposals considers both qualitative and quantitative analysis.
The Acme Consulting proposal requires a very high discount rate or an ROI on a par with the 35% p.a. average returns promised by aggressive growth funds because it is a low-return but high-risk proposition. The business model is untenable and the projected net income is below 6%.
Interstate Travel is a high-return, moderate risk but highly leveraged model. It is recommended that an investor seek returns of at least 20% to offset this level of risk.
Silvera & Sons, on the other hand, has excellent prospects for its expanded capacity, superb product quality that engenders ready acceptance from direct buyers and end-users, and return that may top out at 7.6% at the end of three years. Since the only risk inherent in this proposal is that intrinsic to any foreign investment and the country is a low-to-moderate risk, an investor can indeed be satisfied with a return that equates to that on Treasuries (2.5%) plus a foreign-risk surcharge of around 5%.
Findings – Qualitative Analysis
The Acme Consulting venture seems ripe with opportunity, given the possibility of taking away business from generalist consultants and offering both business development and marketing research for high-technology companies wishing to do business in North America, Europe and Latin America. There is certainly no lack of third-party market research companies, with many already engaged in high-technology markets.
However, Acme seems to have set its sights wrong with the strategy of undertaking business development for large and medium high-technology firms like HP, IBM and Microsoft. The rationale for outsourcing business development spadework must principally be the greater objectivity of outside consultants and presence in markets where the client has no subsidiaries or affiliates. But this is not true of the targeted companies which have infinitely better global reach and well-informed local subsidiaries than Acme can ever hope to achieve, notably with just 3-5 partners initially.
Other significant vulnerabilities of the Acme business plan have to do with the macroeconomic environment and the fratricidal nature of the high-technology space (Ellis, 2007). End-user investment in high technology that cannot show a positive ROI immediately has shrunk markedly in the face of the current recession (Arohan, 2009), which has spilled over into overseas markets and for which there is unhappily no end in sight yet, according to no less than Mr. Obama (Babington, 2009). Secondly, the intensely competitive nature and short times-to-market of high-technology mean competitors are very guarded about divulging their plans for new products, services and markets to operations like Acme that are so specialized they are likely to service direct competitors all the time.
Findings – Quantitative Analysis
The extremely high risk of an Acme investment is made plain in the reluctance of the company itself to project healthy revenues in the first three years. Even projected year 3 revenues of $289,000 are puny given the six figures typical of single multi-country market development and research contract.
At Interstate Travel, the most serious weakness is that the startup will be highly leveraged. The debt-to-equity ratio is 10 from just $250,000 in equity and $2.5 million in long-term loans. This puts extreme pressure on the travel center to generate sufficient returns to service the debt.
References
Arohan (2009). Recession stocks and investing strategy for the coming period of high inflation. Web.
Babington, C. (2009). Obama: Full world economic recovery ‘a ways off‘. Associated Press wire feed.
Ellis, S. (2007). An investor’s guide to business development companies.