In an economy the most important decision to be taken by an investor is to decide in which business he should invest his money so that he can grow and secure his money in shortest possible time. In uncertain situations due to lack of proper strategic business planning many companies have faced crucial problems ultimately resulted in loss of investment for an investor.
However, planning before starting business operations and to determine the key factors that company possess which will be utilize in the intense competitive corporate world provides an opportunity to investor to analyze the position and image of company and the risks associated with the company so that he can choose the most secured business to invest his funds.
In given case, three companies have been considered as to decide for an investment decision from the perspective of an investor.
Acme consulting which primarily is a consulting firm for the marketing of high tech electronic goods in the global market.
To assists its corporate clients for the development of business and market internationally, it provides enhanced expertise with proper organizational structure in relation to companies goals that differentiates it from other consulting companies. Prime target for this business are large companies such as IBM, Microsoft, Intel, Sony etc. The other business considered for investment is Silvera & Sons that exports best quality coffee beans to the U.
S. market and locally in Brazilian market sells to wholesalers. Considering the increased demand of coffee worldwide especially in European and U. S. market provides an opportunity to this business grow rapidly with effective business planning. It differentiates its product on the basis of quality and targeting a niche market segment for its business. Another business for investment decision is Interstate travel centre that provides fuel and restaurant facility for truck business.
Commercial freight transportation market is growing at high rate worldwide for the inland transfer of goods. Analyzing the business strategy and financial records of these business clearly emphasize on the different intensity of risk associated with each one of them. If we look at the business of coffee and see the consumption trend of coffee in U. S and European market this enlightens the demand to be managed by increased supply of coffee beans hence more inflow of cash enabling more company to earn more profit.
Even in economy recession people’s attitude towards consumption habit of coffee is more or less same which suggest that such business can earn profit in every market and will not be affected much by the ups and downfalls of economy hence minimizing the business risk to its lowest extent. Compare to that if we analyze the market risk of Interstate travel centre, the most important concerns for business that matters is the reflecting prices of crude oil and its impact on the economy.
However, people keep utilizing variants of crude oil to run their vehicles that suggest this business will keep running in its region, but the competitive edge would be achieved by branding strategy of the product by the business that will help in skimming of the market profit and the off-side facility of restaurant would build the demand of business to attract more potential customers. The most risky business among the ones which are under consideration is Acme Consulting based on the business market which it is targeting.
Multiple competitors are offering their services to the same market segment which they are targeting due to which it would be difficult for this company to convince companies to hire their services in spite of their competitors. Main reason for biggest risk associated is the rapid changing trend in electronic gadgets market that forces companies to minimize their cost of production and develop the business with minimal use of resources that would prevent the companies to consult a new entrant in market for their business development.
However, it would require a long time to build the goodwill of the business in the market only after which company’s revenues will start inclining. For an investor it would be most risky investment decision as if this consulting company will appear unable to draw business of their competitors and to offer their services to respective companies that it is focusing on. In relation to that an investor will not be willing to freeze his money for a longer period at one place as money worth start declining over a period of time (Levy and Sarnat, 1994).
In contrast to market risk if we analyze the financial forecasting of these businesses, it is apparent for an investor to decide the return which he would require on his investment. Based on the profitability index, Silvera and Sons is consistently showing an increase trend that will add up to the equity of the business and increasing the net worth of business. However, financing of the business patterns from the long term debt is highly unsuitable of Interstate Travel and Acme consulting because a big amount of earning is paid out as interest expense that builds up risk if company is affected in any unexpected situation.
Similarly Acid test ratio of Acme consulting is showing highly critical situation (as it is less than 1) that suggest that company may suffer from current liabilities in short run. An investor would demand the interest rate of return that would compensate for the risk associated with the business in addition to risk free return (Bodie, Kane & Marcus, 2005). This is dependant on the amount of risk an investor is taking in a business, as if an investor is investing a huge amount of money in highly risky business he would ask for more better return compare to risk averse investment decision (Lumby, 1988). Conclusion
Based on the analysis of business plans the most risky investment decision for an investor is in Acme Consulting hence having highest discount rate. Apparently, due to sustain and steady growth of coffee Silvera & Sons depicts less risk for an investor and it would be more secure investment opportunity for an investor from an aim of earning high returns therefore having lowest discount rate. References Bodie, Zvi. Kane, Alex. Marcus ,Alan J. (2005). Investments?. Edition 6. Published by McGraw- Hill Irwin Levy, Haim and Sarnat, Marshall (1994). Capital investment and financial decisions. Edition 5 Prentice Hall.
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Financial Decision Making. (2020, Jun 02). Retrieved from https://studymoose.com/financial-decision-making-new-essay