Problem:
Imagine that you are a senior manager of a company operating in Hong Kong in a highly innovative and competitive market with an annual turnover of US $500,000,000 and that you have a first draft of what can be a good business opportunity with an estimated investment (sunk) cost of US $50,000,000.
Your intuition is that it might be sensible to go ahead with the investment, but, given its size and the high risks involved in such a decision, the company should study very carefully the investment project. In order to do so you decided to organize a task force with the company's best economists, accountants and engineers.
You formally invited each member of the task force members for a first meeting, taking place next week, where you intend to discuss the specificity of the investment report, namely, the investment appraisal techniques and risk analysis to be used, the level of risk the company is able to take, as well as to give them your view about other issues related to the investment project which you consider important to be addressed in the investment report.
Q1. For the circumstances above, write what you believe could be a sensible memo to send to each member of the task force to invite them for the first meeting. In this memo you should briefly summarize the investment project, stressing its potential importance for the future of your organization and contextualizing the project in the company's current core business and expected industry developments.
Q2. Imagine that after 8 weeks of hard work, the task force gave you a 80 pages investment report where you can see that the project has a 5 years payback period and a positive US$15,000 NPV. After reading the investment report you feel, however, reluctant to invest. Describe possible reasons which could justify your reluctance to go ahead with the investment project, despite its positive NPV.
Q3. Discuss the potential weaknesses of the Internal Rate of Return (IRR), Net Present Value (NPV) and Payback Period (PP) techniques to assess investments for contexts with high market, technical and technological uncertainty, and the advantage of using the Real Options methodology in such cases. Your discussion regarding the advantage of the real options methodology must be supported by a brief introduction of the main aspects underlying the Real Option Theory and the use of relevant real options literature (3-6 relevant articles at least).