In essence, the likelihood of profitability is a longer-term gamble with Acme Consulting than it would be with the Interstate Travel Center, but the upfront risk is lessened by the experience, lower startup costs, and more diverse sources of startup funding that Acme Consulting plans to employ. These are the reasons that the risks associated with this firm are medium instead of high, and the discount rate should reflect this median level of risk. The rate of payoff in the discount rate should also, of course, reflect the amount of time projected to be necessary for true profitability to be achieved (as explicitly outlined in the business plan), as well as the increased level of competition that the company will face in the Silicon Valley (or would have faced in the mid to late nineties).
Silvera and Sons
The most sound investment opportunity provided in these three business plans -- and thus what should be the lowest discount rate to be offered -- comes form the Silvera and Sons business plan. This company has already been in operation under current ownership and management for six years, and has been in operation for a total of more than twenty, with the current owner (Silvera...
) acting as manager for the majority of that time. The profitability of the company in its current state of operation is well established, and the balance sheets provided in the business plan reflect the company's financial health as well as the relatively low costs of operation compared to income. In short, this is an established company with a long track record of health and profit, and is thus a low-risk investment.
The expansion project that the business plan outlines does little to increase the risk that investors/the company faces; as the company is already operation at capacity and has already turned down larger orders from clients/distributors, the potential for growth in the market is already known to exist. Risk might be somewhat increased due to the company's high-end market, which is more susceptible to macroeconomic woes than lower-end coffee beans (considered a staple by millions -- if not billions -- of individuals throughout the world) -- but the expansion of operations is not likely to lead to overspending on the part f the company when compared to increased profitability. The discount rate, of course, would drop to a very low level given the very little risk involved in this plan.
