Investment Decisions

Growing businesses often have to decide between investment decisions. In this case, the business is a holding company that buys restaurants that it believes it can add value to and operate profitably. Using one of our custom-made in-house applications, we helped them assess two alternatives they were considering. One was a traditional restaurant and the other was something new for them; a food truck.

We asked them to provide their estimates of the expected, best case and worst case income and expenses per year over the next 10 years. We then calculated what the total profit of each scenario, for each option, would generate over the 10 year period in today’s dollars.

In either option, the worst case scenarios would loose the business a substantial amount of money. The best case scenario in either option would of course make the business money. The most interesting observation to come out of this analysis however, is the fact that even though it was by far the lower cost option to own and run (therefore lower risk), under the expected scenario the food truck would actually deliver a higher net present value of cashflows than the traditional restaurant. Under the best case scenario the restaurant outperformed the food truck, but only by approximately 12%.

Ultimately the food truck also provided an acceptable yearly return on investment under both the expected and best case scenarios while the restaurant did not. The cumulative weight of the evidence led the company to make a decision to venture into unknown territory with their first food truck acquisition.