Vijay is feeling much better these days. A year ago, he took a big risk and open
ID: 354338 • Letter: V
Question
Vijay is feeling much better these days. A year ago, he took a big risk and opened a cafeteria style
restaurant next to a major university. He knew that college students were as interested in quantity
as they were in quality when it came to eating. He figured that the rice, beans, and legumes of his
native Indian would be an inexpensive way to fill the plates of his customers and fill the plates he
did. After a slow start, word got out that Rising Moon was the place to go for inexpensive, but
decent food when you were hungry.
Now, with his business running successfully, he is considering applying for a liquor license to serve
beer and wine. Although the license is expensive, he knows that the high margins on alcohol would
cover his expenses. As a matter of fact, he expects profits to increase over 30% if he serves beer and
wine. However, Vijay is concerned that serving alcohol could introduce many problems, such as
rowdiness, possibly fighting, and a host of legal issues.
a. What are the four decision elements of Vijay’s decision?
b. Are there any hedging strategies he can employ to avoid the downside risks?
Explanation / Answer
a) What are the four decision elements of Vijay’s decision?
b. Are there any hedging strategies he can employ to avoid the downside risks?
hedging means reducing the risk of commodities, hedging reduces the uncertainty and capital at risk in an investment. There cannot be any strategy applied in this scenario because in this case, a problem with loss of reputation and legal issues and is not a problem with pricing. On can apply alternatives to selling such as he can divide the cafeteria to two parts and sell beer on the other side this may be helpful in reducing the risk and improve some profits
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