Overview:
In this third milestone assignment for the final project, you will continue your analysis of the New Heritage Doll Company. Assuming the role of Emily
Harris, the firm’s financial analyst, your next step in the process is to perform a risk assessment of the two capital budgeting projects being considered. As we are
learning, risk can be identified and quantified, and this is a crucial step in the evaluation of any capital investment project.
For this project involving the New Heritage Doll Company, we will focus on the relevant internal (business) risks that may be present. These risks include marketing, distribution, or technical issues that may compromise the two projects’ success. For the purpose of weighing each project’s merit, how might these risks be measured and mitigated?
Prompt: To complete this third part of the final project, you will continue your analysis by conducting a risk assessment. Specifically, you will:
Identify the potential business risks that apply to the projects being considered by the New Heritage Doll Company,
Quantify the financial impacts of the risk (i.e., price the risk), and
Select appropriate methods for mitigating those risks.
To do this, locate the relevant numbers from the case study and perform profitability index calculations. A profitability index can be used as an arbiter when
capital constraint effectively makes two projects mutually exclusive. In this instance, the NPVs of the two projects are nearly the same, but one project creates
more NPV per dollar of the capital budget expended. It is also an index maximizing choice.
Document your results in the “Milestone Three” section of each specific project tab on the spreadsheet template you used for the previous two milestones. The
module resources may also be useful. Provide a written analysis of the risks associated with each project. For example, what if the computer system malfunctions? What would be the cost to fix it?
What would be the cost of an upgrade? Each identified potential risk should be discussed in your analysis and priced and referenced, by item, on your spreadsheet. Cite specific evidence from the case study and employ at least two scholarly articles to support your claims.
Note that the course textbook will also be useful as you progress through this project. As finance students and professionals, you are also encouraged to use your own experience, understanding, and knowledge of business and industry structure to drive your analysis. Specifically, the following critical elements must be addressed:
V. Risk Assessment
A. Identify the risks to your firm for each of the projects. For example, you should consider possibilities such as cannibalization of current products, new software, issues with development, customer impact, and so on.
B. Next, quantify the identified risks in terms of their potential financial impacts (i.e., price the risks). Justify your estimations and values with specific evidence.
C. For each of the identified risks, select appropriate methods for mitigating those risks. Illustrate your recommended strategies with specific examples
