DESCRIPTIVE STATISTICS, PROBABILITY, AND RISK ASSESSMENT
Scenario: You work for a private investment company that currently has numerous
business investments in real estate development, restaurant franchises, and retail chains.
Following an exhaustive search for new investment opportunities, you have found three
possible alternatives, each of which will pay off in exactly 10 years from the date of initial
investment. Because you only have enough money to invest in one of the three options, you
recognize that you will need to complete a quantitative comparison of the three
alternatives:
Option A: Real estate development.
Option B: Investment in the retail franchise “Just Hats,” a boutique that sells hats for men
and women.
Option C: Investment in “Cupcakes and so forth,” a franchise that sells a wide variety of
cupcakes and a variety other desserts.
Download the raw data for the three investments in this Excel document: Raw data for
BUS520 SLP 1.
Assignment
Develop an analysis of these three investments in Excel. Use expected value to determine
which of the three alternatives you should choose.
Write a report to your private investment company, explaining your Excel analysis, giving
your recommendation, and justifying your decision.
SLP Assignment Expectations
Excel Analysis
Using Excel, make an accurate and complete analysis of the three investment alternatives.
Let Excel do the work for you. Instead of typing the formula in a separate line, just enter it
in the cell. Refer to the following link for more info on doing calculations in Excel:
GOALS OF PROJECT
1) To work out for a private investment company that presently has numerous business
investments in real estate development, restaurant franchises, and retail chains.
2) Following a comprehensive search for new investment opportunities.
3) To incorporate a complete quantitative comparison of the three alternatives
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INTRODUCTION
The best business is the business that keeps on growing by looking for new opportunities and
development ideas. The probability of a still business to succeed without taking risk are very
minimal. Many firms of the past have seen downfall because they either did not find good
investment opportunities or either they lacked the investment analysis for their business growth.
(Kazmier, 2011)
The scenario in which I am working for the private investment company has come to a point
where they have felt the need for investment expansion. They had good business outcomes from
real estate development, restaurant franchises and retail chains. And now they have enough funds
to make another profitable investment. After an in-depth search for new long-term investment
opportunities, the company has come up with further investment in real estate development, new
investment in the retail franchise that sells Hats for both men and women or investment in
franchise “Cupcakes and so forth” that sells a variety of cupcakes and desserts.
Excel Data:
Net Present Value (NPV) is the difference between the present value of cash inflow for each
investment and the present value of cash outflow. It is used in net capital budgeting to analyze
whether the investment in the three alternatives will be profitable or not. Probability column is
showing the expected probability that the investment will be positive or negative.
Expected value is calculated in-order to calculate the expected return on investment. The graphs,
on the other hand, are showing the relationship between investment for each alternative.
(Conceptual statistics for beginners, 2006)
Excel Analysis steps:
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The raw data for the three investments in excel was first tabulated. The expected value E(x) was
calculated for each of the investment in all the categories of High, medium and low. Expected
value was calculated by multiplying the probability of Net Present Value(NPV) with the NPV
values of investments. Then the values were put together in a bar graph. There are three graphs
which show high, medium and low investment details. Each of them shows a separate trend for
expected values of investment in all three alternatives of investment. Out of each expected value
for all three investments alternative, the maximum value is also calculated with shows the best
outcome among all. (Wegman, 2012)
Recommendations for perusing investment
- High
From the graph in excel calculations for all alternative, it can be deduced that for a greater
outcome of the company “Just Hats” is the best option. The reason for this is that net present
value (NPV) is more for “Just Hats” which creates more expected outcome by investing here.
If the company has a high investment in the boutique that sells hats for men and women, then
the total cash inflow will be a lot greater than the cash outflow becoming a bigger boom for
revenue in comparison to other options that are real estate development and “Cupcakes and
so forth.” Real estate development has two drawbacks to “Just Hats.” First, it has less inflow
of cash due to which there is less NPV. and the other drawback is that the probability of the
NPV is slightly less than the probability of “Just Hats.” (Excel Data & Kazmier, 2011) - Medium
As for the medium investment is a concern, there is a large peak for “Cupcakes and so forth”
due to the more massive inflow of cash which increases NPV in comparison to real estate and
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“Just Hats.” Hence, where medium investment is concerned, “Cupcakes and so forth” will be
very profitable for the company. This way the turnout will be greater for the company. (Excel
Data)
- Low
As far low investment is of concern, “Just Hats” has an expected value of thrice as much the
runner up that is “Cupcakes and so forth.” The higher net present value for “Just Hats” has a
tremendous output of low investment by the company. (Excel Data)
Conclusion
From the calculations of maximum expected value, it can be concluded that high investment of
company in the retail franchise “Just Hats” that sells hats for men and women will be the most
profitable option among all three alternatives which pays off in 10 years from the date of initial
investment. “Just Hats” is the best option for both high and low investment program for the
company. It has greater NPV and more probability to achieve their target. (Excel Data &
Kazmier, 2011)
References
Conceptual statistics for beginners. (2006). Choice Reviews Online, 43(11), 43-6572-43-6572.