The only risk that is introduced for the analysis is related to the exchange rate between the UK Sterling and the US Dollar. The contract is priced in USD. If the Sterling moves in the opposite direction, then naturally, this may leverage into a much greater decrease in profits since the costs of the company will not change due to being denominated in UK Sterling.
A non-discounted method that could be used to evaluate the contract would be the payback period. In the payback period, it is seen how much time would it take for the project to recoup its costs. The answer is typically in 2-3 years. This method is relatively simple and easy to understand. However it can only be used for short term projects. Moreover, this method ignores the time value of money which is very important for project finance. Moreover, this method also does not take into account the riskiness of the project as the discount rate is not used which normally accounts for the riskiness. Moreover, this is a relative measure of evaluating projects. It can only be used when a comparison needs to be made between two projects. Finally, this method also does not contain a benchmark, comparison to which results in a ‘yes’ or ‘no’ answer. Such benchmarks are contained in other methods such as IRR where a rate above the discount rate indicates a positive result and NPV where an outcome that is positive indicates a positive result. Such benchmarks allow easy decision making.
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.