Hey there!
I was posed a tough question on a 'go - no go' decision on investments
Scenario:
- 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
Question:
- 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 :)
Thank you
Anonym0us
Hi Christian, thank you for the comment. These are 3 very interesting drivers I should consider. Can you elaborate on how (in general) they impact our decision? Thank you so much!
In any case, we don't have precise data, but we can guess some more info: 1) Total size of the investment additional revenues would be 0.5% on the company total, the company already has 200 similar airport/station restaurants; 2) Around 15%, equally split between the license and the cooking equipment; 3) Not limited, we are active in all the EMEA market and these opportunities arise quite often, let's say 10-15 times a year (also: no-Covid19 scenario)
Hi Anonymous, since this gives us relevant info on the return on investment (15% for the license and cooking one time vs. 10% profit per year), i would go ahead and make a quick ROI calculation for both scenarios, 1 and 5 year investment. The results would support the points you put across as well (1-year rather no, 5-years possibly yes). Maybe to top off the argumentation, make an assumption on how long licenses usually last in other opportunities - that would seem more quantitative than using only the strategic value of the investment (which is also valid considering b2c brand awareness in the market, but difficult to quantify)
(edited)