The Interstate Travel Center is the most risky of the three business plans due to the following points:
- The first area of risk is the organizational structure. The fact that the owners of the business, Steve and Janet Smith, are to head the operations and concentrate on all areas of management with all the managers reporting to them is risky. In such an arrangement, there is nobody responsible for any single area, leading to lack of accountability. Also, the owners may be entrepreneurs, but may have no knowledge of the operations of the firm, or even managerial skills. It is also very unlikely that they would run all the departments effectively. Steve and Janet Smith can be directors, but there should be only one head of the company who would be the Chief Executive or Managing Director. Then there can be managers in every department such as marketing, finance, and administration. These managers should be people with expertise in those areas, and they should all report to the Managing Director or Chief Executive. If the business has enough resources, they can also employ a deputy to whom the departmental managers report to, who then reports to the Managing Director or Chief Executive. This should be a business executive with the required skills and expertise.
Another area of risk is the proportion of capital funds that will be financed by borrowed funds. Out of the required initial costs of $ 2.75 million, only $ 250,000 will be financed by equity funds. The remaining $ 2.5 million, which constitutes more than 90 per cent of the total start up costs, will be financed by borrowed funds. This places the business at a risk of harassment from creditors and may even an easy target of takeover by the lenders.
The last area of risk is the plan to purchase land, develop it, and construct the travel center. Since there are already other similar businesses in the industry which are already established, it would take time for this new establishment to match the competition.
The second risky of the three business plans is the R J Wagner & Associates Realty, due to the following points:
- The first area of risk is the fact that the corporation has a single stock holder and principal investor, which means that decisions are made without consultation. There is a risk of the principal investor making decisions which affect the firm negatively, but cannot be challenged by anybody.
- Another area of risk is the plan to pay the highest commissions to sales agents as compared to similar firms. This would lead to lower returns to investors. The sales agents are also not trained, and are to be trained by the firm, at the expense of investors.
- The least risky of the three business plans is the Ice Dreams, due to the following points:
- Shave ice is already popular among customers, yet there is no such business in the city of El Centro, California. This means that there is ready market for the product, and there is no competition. The location of the business also guarantees a constant flow of customers. The plan to sell other products also allows the business to offer variety, thus widening its customer base.
The Interstate Travel Center should be evaluated using the highest discount rate, followed by the R J Wagner & Associates. Realty Ice Dreams should be evaluated using the lowest discount rate because it is the least risky.
References
FinanceProfessor.com (n. d.). Present value. Web.
Notes and tutorials in finance. (n. d), Web.
Time Value of Money: Self Paced Overview. (n. d.). Web.