Question

discussion forum :-

1st person:-

One of my responsibilities in my previous role, was calculate risk and return on investment.

i recently worked on a project where I was asked to look at what format should our new products go into. With this project I had to learn the process of both options, build a financial model to show what sales, cost and timing would look like. The analysis included cost curves to show scale up over volume, forecast over years projected and operations impact (including capacity planning). This was all compiled to show break-even points and compare long-term vs short-term gains.

The risk I had to weigh and show in the project included payback in volume and years comparing both product formats, the technical risk of doing either format, and market adaption risk. While one format had long term better payback, it was important to understand what format the market preferred. If we went with the most cost- effective product but couldn’t sell it, then we would never achieve the payback we needed. With all things in play, we had to make sure that technical aspects could be accomplished, or the product would not be manufacturable and none of the other considerations mattered.

response to the 1st person's post :- 120-150 words

Answer 1

With regards to risk analysis you should also determine the variability of possible returns from the sale of new products. A risk-return spectrum should be made to better determine the risk-return tradeoff with regards to sale of the new product. The financial model that has been built by you should also incorporate inflation rate. This is because for any organization or company they wish to recover enough amounts so as to be able to pay the increased cost of investment due to inflation. Secondly your financial model should also have scenario, sensitivity and simulation assessments. Scenario analysis will help you to determine consequences of an action under different set of factors. For instance what will happen to the payback if inflation rate increases? Sensitivity analysis will help you to determine how much its revenue will be affected by variations in raw material prices, cost of labor etc.

(147 words)