I was posed a tough question on a 'go - no go' decision on investments
- Our client is a large company that operates airport restaurants. It is currently considering an investment for an additional restaurant in Milan airport
- In this particular restaurant, the BP shows that we can get 10% profit in a year. Our benchmark 'company' profit on our investments is also 10% a year
- Of course, this investment has some up-front: license, cooking equipment, area setting
- How would you consider this investment if we consider that the license is valid only for 1 year (after that, we are not sure we'll be able to extend it) ?
- How would you consider this investment if the license were valid for 5 years (profit stays the same: 10% a year)?
My View (in short)
- One-Year Investment It doesn't seem to clever to invest to get our average return for one-year only, because the investment may have significant up-front costs (cooking equipment, license, etc.) that harm the financial sustainability/value of it, putting at least under comparable benchmarks --> I would advise against, unless long term strategic pros emerge
- Five-Year Investment We know that this is a quintessential 'basic' investment for the company. So investing or not investing is the same: barring demand issues or other barriers, there will be other alternative investments with the same rate. --> I would consider the 'strategic value' of this investment (e.g. we want to increase our presence in the Italian market): if this investment is 'above-average strategic', I would say yes; if it's 'below-average strategic', I would say no.
What do you guys think? I am really looking forward to hear your smart point of views :)