Question

Rachel’s Crab Heaven (RCH) supplies crabs, fish, and clams to restaurants along the east coast. Rachel is sole owner and chief executive. She currently has one fishing vessel but is considering investing in one that would increase her daily harvest two to three fold. Rachel estimates the new vessel would generate an operating cash flow of $207,000 per year for eight years. The vessel has an initial investment of $1,250,000. Rachel will borrow the entire amount from First Bank at 6.2%.

Describe in detail the operating risks facing Rachel (assuming she accepts the expansion into lobsters).

Answer 1

Some of the possible operating risks facing Rachel are :

• The expected annual operating cash flow may not be realized
• Higher fishing expenses such as cost of feed, cost of nets, cost of fuel etc. This would increase the operating costs and reduce the operating cash flows.
• Fall in the price of lobsters. This would decrease operating revenue
• Decrease in availability of lobsters in the fishing area. This would decrease the revenue and cash flows.
• Risk of storms, rough waters or cyclones. This would decrease the number of operational days and reduce the operating revenue.