Another method that could have been used would be sensitivity analysis that could tell how much the profitability of the project would change for a given change of variables. For example, in this case, the sensitivity of the company’s profits to the exchange rate could be used since the exchange rate is important as already outlined in the preceding section. However this method also has disadvantages. The first one is the this method would only use the profits of the company as a measure of viability of the project while there are other things to consider as well such as initial investments and so on. Secondly, this would just be an accounting analysis since profits are merely an accounting measure and the real indicator for any project must be the cash flows.
The first factor that is important for the analysis of profitability is the exchange rate. The contract explicitly states that the product will be priced in dollars. This is odd as the company is UK based and it conducts its business in pounds (John 2001, 326). Moreover, all the costs that the company will go through, both operational and financial will both be pounds based and this includes an added measure of risk t the company as it will affectively leverage it operationally in case of an exchange rate change (White 2006, 127). An increase in the exchange rate in favor of the dollar will result in a more than proportional increase in the profit of the company as the other costs will remain fixed while the revenue grows. On the other hand, a decrease in the exchange rate will decrease profits by a more than proportional amount to the same reason. Hence the denomination of the price in dollars adds a measure of risk to the company’s operations. A sensitivity analysis in this case would help as it would tell how much the profit of the company would change as a result of the change in exchange rate.