The role of entrepreneurs and intrapreneurs — practice questions

1. As an Entrepreneur:

• Risk: The engineer would need to quit their job, forgoing a guaranteed $90,000 salary (opportunity cost). They would also need to raise start-up capital, for example, $200,000 for development and marketing. This is a significant personal financial risk.
• Reward: If the app is successful and achieves a valuation of $3 million in 4 years, the engineer, as the founder, would own 100% of the equity. The potential for wealth creation is immense.

2. As an Intrapreneur:

• Risk: The primary risk is career-based. If the project fails, it might affect promotion prospects. However, their job and salary are secure. The financial risk of the $200,000 development cost is borne by the telecom company.
• Reward: The engineer would keep their $90,000 salary. If the project is successful, they might receive a significant bonus (e.g., $50,000) and a promotion to lead the new product division. The reward is substantial but capped compared to being an entrepreneur.

Comparison: The entrepreneurial path offers unlimited reward potential but carries high personal financial risk and opportunity cost. The intrapreneurial path offers lower, but still significant, rewards with minimal personal financial risk.

Here is a step-by-step calculation and evaluation:

Step 1: Calculate Total Variable Costs Variable costs are 30% of revenue.

• Calculation: $250,000 (Revenue) × 0.30 = $75,000

Step 2: Calculate Total Annual Costs Total Costs = Fixed Costs + Variable Costs

• Calculation: $130,000 (Fixed Costs) + $75,000 (Variable Costs) = **$205,000**$

Step 3: Calculate Forecasted Annual Profit Profit = Total Revenue - Total Costs

• Calculation: $250,000 (Revenue) - $205,000 (Total Costs) = **$45,000**$

Step 4: Evaluation

• Financial Reward: The forecasted annual profit of $45,000** is **$15,000 less than the entrepreneur's current salary of $60,000.$
• Risk and Opportunity Cost: The entrepreneur would be taking a significant risk. They are giving up a guaranteed $60,000 salary (opportunity cost) for a business projected to make only $45,000 profit in its first year. Furthermore, their initial investment of $80,000 is at risk if the business fails.
• Conclusion: Based purely on these initial forecasts, the venture is not financially attractive. The reward is lower than the opportunity cost. The entrepreneur should reconsider their business plan, perhaps by finding ways to increase revenue or decrease costs, before proceeding.