Finance

posted by .

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?

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. financial management

    A new project will increase inventory and accounts receivable by an average of $1 million each. Cash levels and other working capital accounts are expected to not change. What effect will the project have on working capital?
  2. finance

    A company wants to invest in a new advertising program. Using the NPV method of capital budgeting, determine the proposal’s appropriateness and economic viability with the following information: • The new program will increase …
  3. 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 …
  4. finance

    14–1. (Defining capital structure weights) Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $400 million. Since the primary asset of this business is real estate, Templeton’s …
  5. Finance

    You initially contributed $200,000 of your own money and in return you received 2 million shares of stock. Since then, you have sold an additional 1 million shares of stock to angel investors. You are now considering raising capital …
  6. finance

    Defining capital structure weights) Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $410 million. Since the primary asset of this business is real estate, Templeton’s management …
  7. finance

    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 …
  8. finance

    Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $350 million. Since the primary asset of this business is real estate, Templeton’s management has determined that they will be able …
  9. finance

    Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $350 million. Since the primary asset of this business is real estate, Templeton’s management has determined that they will be able …
  10. finance

    (Defining capital structure weights) Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $400 million. Since the primary asset of this business is real estate, Templeton's management …

More Similar Questions