Comparing Project Risk of Vishnu Developers.

The Managing Director of Vishnu Developers was pondering over two project proposals at his desk. Vishnu Developers recently purchased a sizeable land in Gachibowli at Hyderabad at a cost of Rs. 90,00,00,000. Vishnu was confused on whether to construct luxury condominiums or apartment flats. The area was known for Luxury homes. In June 2012, Vishnu Developers were able to sell Luxury Condominiums at a good profit, nearby the purchased land. Given the current Economic situation, there was doubts in the mind of people. Given the companys current financial situation, Vishnu didnt want to enter into a great deal of risk. The usual method of choosing a project was the expected Return on Investment before Tax. So, the criteria for choosing the best alternative would be the expected Return on Investment. In the given piece of land, Vishnu Developers could built upto 110 Luxury Condominiums or 450 Apartment Houses. The Sales team predicted that the Developers will be able to sell 100 Condominiums at a price of Rs. 2,20,00,000 each. The project would require an additional investment of Rs. 25,00,00,000. Each condominium would incur a variable cost of Rs. 80,00,000 which includes all the costs pertaining to construction. The risk associated was expected to be high, though they were unclear on the situation. The sales team estimated that they would be able to sell 400 apartment flats at Rs. 50,00,000 each. This project would require an additional investment of Rs. 10,00,00,000 Each apartment would incur a variable cost of Rs. 20,50,000. The Managing Director calculated the ROI. He found that the ROI for Luxury Condominium stood at 12.82%. The ROI for individual apartments stood at 9.89%. Since the risk associated with Luxury Condominium was high, Vishnu was confused between the two options. He hired a Marketing Research Consultant to figure out the risk associated with project. The consultant identified three variables that will affect the project. He decided to illustrate the risk by revealing the spread of possible outcomes.

Table 1 : Vishnu Developers sales forecasts Luxury Condominiums Estimate 85 90 95 100 105 110 Probability .10 .15 .30 .25 .15 .05 Apartment Flats Estimate 350 375 395 410 430 450 Probability .05 .15 .25 .30 .15 .10

Table 2: Vishnu Developers Investment forecast Luxury Condominiums Estimate (Rs) 19,00,00,000 20,50,00,000 22,50,00,000 24,50,00,000 27,00,00,000 30,00,00,000 Probability .05 .15 .10 .30 .25 .15 Apartment Flats Estimate (Rs) 8,25,00,000 9,00,00,000 10,00,00,000 11,00,00,000 12,00,00,000 13,25,00,000 Probability .05 .20 .30 .25 .15 .05

Table 3: Vishnu Developers variable cost forecast Luxury Condominiums Estimate (Rs) 71,00,000 74,00,000 78,00,000 81,00,000 84,00,000 87,00,000 90,00,000 Probability .05 .15 .15 .10 .25 .20 .10 Apartment Flats Estimate (Rs) 19,00,000 19,60,000 20,00,000 20,50,000 20,90,000 21,50,000 22,00,000 Probability .10 .10 .25 .20 .15 .15 .05