Question

Discuss the different types of financial and non-financial risks which pertain to the opening of pharmacy shop

Consider the opening of a retail pharmacy outlet, recommend a capital investment project and discuss what value will it add to the firm and should the organisation take up the project or not? (Hint: Use capital budgeting).

Answer 1

Different types of Risk associated with opening a Pharmacy shop:-

1.Financial risk

1. Cost of capital risk

To opening a pharmacy shop capital is required ,which can be arranged/borrowed from different sources such as bank loan,other loans etc.At starting of business ,sales of medicines would be very low but cost of capital is there ,so there is risk of default,whether business would be able to pay its fixed expenses or not .

2. Market risk

Market risk signifies the adverse movement in market,demand and supply of medicine were all time low ,so there is market risk,whether pharmacy shop will get business or not .

3. Interest rate risk

Interest rate risk occurs due to movements in interest rates. This risk is the possibility that Interest have to be re-priced on account of changes in the market rates.

If it happens ,the firm need to pay more interest ,so there is risk of interest.

Non financial risk

1.Demand risk/Supply risk

The demand of medicines were more nearby hospitals,if shop is away from hospital then there is less demands of medicine,so there is risk of demand of medicines.

2. Business risk

Business or operating risk pertains to the pharmacy market in which the pharmacy shop operates, such as whether medicines were available on time or not,lead time ,lots size,transportation /logistic issues,license issues etc.

3. Strategic risk

If there is a large no of competitors are available near by pharmacy shop ,then the business sales would be affect.The ideal pharmacy shop location is nearby a hospital.

The capital investment for the opening a pharmacy outlet is building

The decision should be taken based on Greater +NPV

The pharmacy main goal is to provide prescription medication for customer at lowest price on the market,efficiencies in pharmacy operations by targeting a specific segment of the market .