finance

posted by .

BBA307: Finance


Exercise 8A



Assignment 8.1










Assignment 8.1: Capital Budgeting Application


You have just graduated and one of your favorite courses was Financial Management. While you were in school, your grandfather died and left you $1 million. You have decided to invest the funds in a fast-food franchise and have two choices–Franchise L and Franchise S. You only intend to be in business for three years and then sell the franchise. See the cash flows for each year below:




Year


Franchise L


Franchise S




0


$100


$100




1


$ 10


$ 70




2


$ 60


$ 50




3


$ 80


$ 20


Depreciation, salvage values, net working capital requirements, and tax effects are included in the cash flows. The required rate of return is 10%. You must decide which franchise to invest in.

Procedure
1.What is each franchise's NPV? Be sure to show your calculations.
2.According to the NPV, which franchise or franchises should be accepted if they are independent? Which should be accepted if they are mutually exclusive?
3.Would the NPV change if the cost of capital changed?
4.What is each franchise's IRR? Be sure to show your calculations.
5.What is the logic behind the IRR method? According to the IRR, which franchises should be accepted if they are independent? Mutually exclusive?
6.Would the franchises' IRR change if the cost of capital changed?
7.Draw the NPV profiles for each franchise. At what discount rate do the profiles cross?
8.Using the NPV profiles above, which franchise or franchises should be accepted if they are independent? Mutually exclusive? Explain. Are your answers correct at any cost of capital less than 23.6%?
9.Which method is best and why?

Submission


--------------------------------------------------------------------------------

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. finance

    why is WACC important to an organization?
  2. Computer Science - Java

    Hi, For an assignment I am doing, we have to have 2 service classes and one application class. One service class is already written (i.e. DiceGame1) and I am writing another one (i.e. Player) that is supposed to use the previous service …
  3. Finance

    I need some help with an assignment that I am working on for Introduction to Finance class.
  4. Fin 200 Intro to Finance

    I have to make a statement of cash flow for the Crosby Corp from our week 1 assignment but I am totally lost, i just don't understand how to accomplish this.
  5. finance

    When performing a capital budgeting analysis, interest expense included in the cash flows should be based on the current interest cost and not the historical cost of interest. Comment.
  6. finance

    What are the similarities and differences between net present value and interest rate of return?
  7. finance

    Define the following terms and identify their role in finance: 1. Finance 2. Efficient Market 3. Primary Market 4. Secondary Market 5. Risk 6. Security 7. Stock 8. Bond 9. Capital 10. Debt 11. Yield 12. Rate of Return 13. Return on …
  8. finance

    You have just graduated and one of your favorite courses was Financial Management. While you were in school, your grandfather died and left you $1 million. You have decided to invest the funds in a fast-food franchise and have two …
  9. Budgeting

    A quaint but well-established coffee shop, the Hot New Café, wants to build a new café for increased capacity. It’s expected sales are $800,000 for the first 5 years. Direct costs including labor and materials will be 50% of sales. …
  10. Finance

    Assignment 8.1: Capital Budgeting Application You have just graduated and one of your favorite courses was Financial Management. While you were in school, your grandfather died and left you $1 million. You have decided to invest the …

More Similar Questions