A firm is comparing two investment options. Project A involves upgrading existing machinery, which will yield modest but highly predictable profit increases over the next 5 years. Project B involves building a new factory in an emerging market, which has the potential for very large profits, but these would not begin for 7 years and are subject to significant geopolitical risk. How do the core characteristics of future investment profits complicate the firm's decision between these two projects?
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Evaluating a Pharmaceutical Investment
A firm is comparing two investment options. Project A involves upgrading existing machinery, which will yield modest but highly predictable profit increases over the next 5 years. Project B involves building a new factory in an emerging market, which has the potential for very large profits, but these would not begin for 7 years and are subject to significant geopolitical risk. How do the core characteristics of future investment profits complicate the firm's decision between these two projects?
Comparing Investment Profit Profiles
A firm can accurately calculate the total return on a 10-year investment project by simply summing up the projected annual revenues, because future economic conditions are generally stable and predictable.
Evaluating Short-Term Investment Horizons