Business Finance Assessing the Risk in Three Potential Investments

The way an investment is assessed will include consideration for the level of risk that is present in that investment. The higher a risk associated with a business the higher the required rewards referred to as the risk and reward equation. Where the risk premium increases this will also lead to the use of increased discount levels in discounted cash flow assessments, such as net present value (NPV) calculations. In order to consider the way this may be applied to investment decisions three different business plans may be assessed; Acme Consulting, Interstate Travel Center and Silvera and Sons.

Risk may be assessed using a number of different criteria. From the perspective and an investor, or lender, the key aspect of risk will be the determination of whether or not the money invested or loaned will be returned and whether is will make a profit sufficient to justify the risk (Berry, 2012). This also incorporates an assessment of the viability of the business and the potential financial returns (Reilly and Brown, 2011). The aspect of opportunity cost may also be considered, as an investment in one company may be seen as risk in terms of the potential returns which may have been gained elsewhere where investments are mutually exclusive (Nellis and Parker, 2006).

Acme Consulting

The first of the firms is Acme Consulting. This is a start up firm offering premium consulting services to large high tech manufacturers, such as IBM and HP, and a secondary market of medium sized media businesses, with a head office in the renowned Silicon Valley area; placing them in a key area. The firm is being established by individuals with relevant knowledge in the relevant areas of marketing a consultancy as well as the high tech industry. It is noted that the market for these services is currently fragmented which may provide opportunities, With related diversification of services, including retainer work, market research and project consulting the firm will be able to offer...

The sales patterns are expected to vary over a year, rather than remain level.
The financial aspect of the firm is very important when assessing risk (Reilly and Brown, 2011). The company requires a relativity small level of capital investment compared to the next two cases, and on an operating basis will break even in the first year (during month 9 calculated using the operating profit). However, profit within the first few years is relatively low, it is minimal in the first year and although it is increasing, by year 3 the net profit reaches $65,000, equating to a 6% profit margin. This limited the potential return on investment for investors.

The task may also be assessed with reference to potential security that the firm may provide. A key concern with Acme may be the low level of physical assets which is being created, providing little physical security for any investment, In terms of risk it may also be noted that the firm has not yet been incorporated, as such any agreements between the firm and an investor may be risky as the firm does not yet have its own legal personality. Overall, Acme may be using only a small level of capital, but they are creating limited assets as security and the return they are creating is constrained. In addition the current start up status of the firm, which is yet to be incorporated, may be seen as adding additional risk.

Interstate Travel Center

The Interstate Travel Center involved the development and then operation of services and amenities of truck drivers, including gas sales, a convenience store and restaurants. The location will be on a busy interstate, where there is a high level of potential passing trade with only limited local competition available. There is also the potential for further growth with the development of a 'Port To Plains' corridor increasing the traffic to the locations, but this is not assured. This may offer a potential but as it is not assured it should not be considered in the assessment.

The plan itself benefits from…