Subject : Risk and Option Analysis of Proposed Venture
With reference to the company’s new announced project about exploring the meeting market of Country A, we have some points which I think would be useful to consider before undertaking the project.
Rephrasing the whole project definition and scope as you provided in the annual presentation, our company is going to explore the Moroccan market. Our company, Xava Coffee and Confectionary is undoubtedly among the best companies of the country. Being a multinational company having our operations in France, Germany and North America, we are ...view middle of the document...
Along with this, due to regional cooperation associations, we can have low export cost and low export barriers toward the Mediterranean countries and the Middle East.
Along with benefits, there are certain risks annexed with the project. The most important source of risk is consumer taste of Country A people. Country A maintains hot weather in most parts of the year. Coffee is more suitable to people living in colder parts of world which is why it is more famous in America, Europe and Canada than Africa. Though market in Egypt and South Africa is developing for Xava, it is still not meeting the forecasted level. Major portion of Africa coffee market is held by Nescafe, the French brand. On the other hand, coffee is being consumed in Country A for only four months of November to February usually. In those conditions, it is quite risky to establish a production plat costing $15 million as condition for demands are still unsatisfactory. In addition to demand, Country A entails poor peace conditions1. Unhealthy activities for business such as terrorist attacks are common in that part of North Africa and it may not be recommended to spend fixed capital in a risky area.
Real Option Analysis:
If we perform the real option analysis of our proposed project, we find significant factors to ponder. First of all, the disadvantage that a multinational company like Xava has to confront is the exchange fluctuations. Presently, we have core production unit at Canada and France. The constant fluctuation in Euro and Dollar relative prices created a loss of $298,999 in exchange losses in 2008. This even soared to $1.3 million in 2009 due to severe global financial turmoil. This exchange difference will surely hit our margin. At present, we are selling one pack of coffee beans at 14% margin to the customers. On the other hand, exchange fluctuation was about 10-15% during the last year. We have planned to sale the coffee in Country A market at 16% margin so if current fluctuate by 15% this year; the margin will reduce to 13.5%. This is even below than what we are earning in our country.
The second element of real option analysis is cultural difference between the local and American employees. As we have planned, we will be hiring managerial staff from USA and rest from local work force of Country A. This will not only expose company to cultural difference as well as incur higher cost of...