Financial Decision-Making

Module 2 - Case

Financial decision making

Assignment Overview

The business plan is usually the first formal document a company presents to the world, and it is often crucial in establishing the image and identity of the company. One of the critical functions served by such plans is to present to potential lenders and investors the risk profile of the company -- basically, the chances that if you give them money, you'll get it back. The presentation of the company's financial statements is key to establishing current viability and survivability.

Lots of elements go into the creation and evolution of business plans, and the financials themselves are not self-revealing but must be evaluated in light of the whole company context. Here are three variations on advice about how to put such plans together; each has their own take on how to present and interpret financial data:

Darrell Zahorsky, Critical Steps to Writing a Business Plan About.com

BusinessTown.com, Creating your business plan.

As your case assignment for this module, you are to read the following three sample business plans:

Acme Consulting

Interstate Travel Center

Silvera and Sons

For this assignment I want you think in terms of being an investor and what interest rate you would require on your investment in each of the companies. The discount rate for determining net present value is related to risk in a business and the interest rate charged by investors. The article on buying a business by T. Berry, http://articles(dot)bplans(dot)com/index.php/business-articles/buying-a-business/buying-a-business-know-what-you-are-getting/ , talks about the discount rate and risk. You want to make sure that you charge a high enough interest rate to recoup your investment and make some money. Remember the higher the risk, the higher the interest rate (return on investment) you want to charge.

Case Assignment

The background information has further material on using financial data to assess risks and comparatively evaluate the future possibilities for companies. In addition, you may wish to seek out further information through your own research. When you have reviewed the advice and the plans. please prepare a short (3-5 page) paper discussing:

Which of these three projects do you think should have the highest discount rate reflecting risk inherent in the business plan? Which one do you think should have the lowest?

Please carefully explain your reasoning about each of the three businesses, with reference to the appropriate financial and other information. You do not have to perform calculations or determine a specific interest rate you would charge - that would be extremely difficult in an introductory course. A rating of high, medium and low will do.

Assignment Expectations

Use information from the modular background readings as well as any good quality resource you can find. Please cite all sources and provide a reference list at the end of your paper.

LENGTH: 3-5 pages typed and double-spaced.

The following items will be assessed in particular:

1. Your ability to effectively reason about the relationship between busines risk and the discount rate;

2. Some in-text references to modular background readings.